Fed Cuts Rates for Third Time this Year
Jerome Powell announces another rate cut in lead up to Trump Presidency
The Federal Reserve made its third and final rate cut of 2024, bringing interest rates down to 4.4%. Officials predicted rates will decline to 3.9% in 2025 and 3.4% in 2026. This cautious approach reflects the Fed's effort to curb inflation without overheating the economy, as they aim for a soft landing amidst strong economic conditions. Policymakers have shifted from rapid rate hikes in 2022 to targeted cuts, as inflation has significantly cooled while avoiding drastic economic slowdowns. The new phase involves balancing rate reductions carefully to sustain progress without reigniting excessive demand.
The Fed balances two risks: avoiding excessive economic damage from high rates while ensuring inflation is fully contained. Policymakers now predict just two rate cuts in 2024, down from four previously, and fewer cuts in 2026 and 2027. A cautious approach reflects resilient economic growth, solid consumer spending, and sticky inflation, now projected to end 2025 at 2.5%, above the 2% target. Disagreements remain among officials, with some opposing recent rate cuts to prevent reigniting inflation.
Fed Chairman Jerome Powell acknowledges that it has “been a bit frustrating” that inflation has cooled more slowly than policymakers had hoped. However, he says that, over a longer time frame, the economy has performed better on both unemployment and inflation than many expected just a couple of years ago.
Inflation cools more slowly than desired
The markets have so far reacted poorly to the announcement, especially with Chairman Powell’s less-than-optimistic prediction about further rate cuts in 2025. This also comes amid speculation that Donald Trump’s possible return to the White House could rekindle tensions between the two bodies. President Trump has openly criticized the Chairman and the Federal Reserve as a whole for not adhering to what he believed interest rates should be. Trump has called for the firing of Chairman Powell but does not have the authority to do so. Additionally, Chairman Powell has stated that he will not resign before his term expires, even at the President’s request.
Powell says inflation has come down significantly but “remains somewhat elevated.” Notably, Fed officials expect it to remain at elevated levels in 2025. In their forecasts today, they raised the inflation estimate for next year to 2.5%. Additionally, the Chairman remarked that “improving supply conditions” have supported economic growth and that labor market conditions remain “solid.”
Labor market conditions 'less tight'
'Jerome Powell continues to express optimism in the Fed Board’s plan for disinflation, remarking that “The U.S. economy is just performing very, very well, substantially better than our global peer group.” Powell says there is no sign that a recession is becoming more likely. He repeats his assessment that “conditions in the labor market are now less tight than they were in 2019,” and that wages are not currently a source of inflationary pressure. Despite robust job growth in the previous month, unemployment has been rising gently, and other measures show slight weakening.
The Dow lost 960 points, or 2.2%, marking its worst losing streak since an 11-day slide in 1974. The 30-stock average posted a nine-day losing streak on Tuesday, its longest since 1978. The S&P 500 lost 2%, and the Nasdaq Composite shed nearly 4%.
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