The Federal Reserve cut interest rates by 0.25% on November 7. The labor market has softened, and year-on-year inflation rates have eased, leaving the door open for more interest rate cuts in the future. Federal Open Market Committee projections from September 2024 reflected expectations of rate cuts through the end of 2026.
Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open … [+]
Federal Reserve Cuts Interest Rates
The Fed cut the federal funds rate on November 7 by 0.25%, targeting a range between 4.5% and 4.75%. The interest rate cut of 0.25% was expected, and it is likely to be supportive of equity prices, industrial commodity prices, and bond prices while also weighing on the dollar.
Following a release of the Fed statement at 2 pm ET, Fed Chair Powell faced a barrage of questions in his 2:30 pm ET press conference about the Fed’s decision to cut interest rates and when the Fed may consider pausing interest rate cuts. Powell also artfully dodged a series of political questions in the press conference that was held just two days after the U.S. 2024 elections.
Looking ahead to future Fed interest rate policies, Prestige Economics expects a 0.25% rate cut in December 2024, with more interest rate cuts in 2025 and 2026.
The prospect of further interest rate cuts following a swift and decisive presidential election outcome is supportive of business and consumer confidence, economic activity, and financial markets.
Looking Back To Look Ahead
Federal Open Market Committee expectations of future interest rates are released once per quarter. The last release was in September 2024, and the next release will be in December 2024.
While no FOMC forecasts were released on November 7, the median September 2024 FOMC forecasts conveyed expectations that the federal funds rate will be 4.4% at the end of 2024, 3.4% at the end of 2025, and 2.9% at the end of 2026.
These forecasts imply there would be another 0.25% interest rate cut this year, followed by an additional 1% worth of rate cuts in 2025 and a subsequent 0.5% in 2026.
Although often subject to significant changes, these forecasts clearly point to lower interest rates in the future. FOMC members likely expect to be able to cut rates further as risk factors affecting the Fed’s dual mandate shift.
Dual Mandate Dynamics Support More Rate Cuts
The Fed has a dual mandate to foster full employment and keep prices low and stable.
The November 7 FOMC statement noted, “labor market conditions have generally eased, and the unemployment rate has moved up but remains low.” With a low unemployment rate of only 4.1% in October and over 7.4 million open jobs in September, the labor market is still on relatively solid footing.
The Fed statement also acknowledged that inflation remains “somewhat elevated.” While the Fed has a 2% inflation target, year-on-year September total CPI is 2.4%, core CPI is 3.3%, total PCE is 2.1%, and core PCE is 2.7%. Although all four of these key year-on-year consumer inflation rates are above the Fed’s target, they have been falling on trend.
Looking ahead, we expect year-on-year total CPI, core CPI, total PCE, and core PCE to fall further. However, these decelerations may take time, and we do not expect year-on-year total CPI or core CPI to fall to 2% until 2025.
The big takeaway is that more interest rate cuts are coming if inflation keeps cooling.
What do you think about the November 2024 Fed decision?
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