On November 7, 2024, the Federal Reserve made a key decision to lower its benchmark overnight borrowing rate by 25 basis points (0.25%), bringing the target range for the federal funds rate to 4.50%-4.75%. This marks the second consecutive rate cut after a larger half-percentage-point reduction in September 2024, signaling the Fed’s ongoing efforts to recalibrate monetary policy in response to changing economic conditions.
In a unanimous vote, the Federal Open Market Committee (FOMC) indicated that its focus has shifted from aggressively combating inflation to balancing employment and economic growth. This shift reflects the Fed's evolving approach as it navigates the complexities of maintaining price stability while supporting the labor market.
The Fed's New Focus: Balancing Inflation and Employment
The November 2024 rate cut was widely expected by markets, given the Fed’s signals in previous meetings. The move, while less aggressive than the half-point cut made in September, marks an important step toward easing monetary policy after a period of rapid rate hikes aimed at controlling inflation.
According to the Fed’s post-meeting statement, policymakers now view supporting employment as being at least as critical as continuing efforts to control inflation. In fact, the Fed’s decision to ease rates reflects its assessment that the risks to achieving its inflation and employment goals are roughly in balance. The statement noted, however, that while the labor market remains strong, there have been signs of softening, with unemployment ticking up slightly and job growth slowing in certain sectors.
In contrast to the more hawkish tone earlier in 2024, when the Fed was focused primarily on reining in inflation, the committee’s outlook now emphasizes a more balanced approach. Fed Chair Jerome Powell acknowledged that the economy’s progress toward the Fed’s 2% inflation target, alongside signs of some cooling in the labor market, justifies a recalibration of policy to a less restrictive stance.
“We are recalibrating our policy stance to ensure continued economic expansion while avoiding a situation where inflation rebounds,” Powell stated during his post-meeting news conference. The central bank aims for a "soft landing", where it can control inflation without triggering a recession or causing significant job losses.
Economic Growth: Resilient but Slowing
The economic landscape is showing resilience, even as growth slows slightly. The U.S. economy grew at an annualized rate of 2.8% in the third quarter of 2024, according to the latest GDP data. While this is a strong pace by historical standards, it’s down from the second-quarter growth rate and below initial expectations. The fourth-quarter projections from the Atlanta Fed point to a more modest growth rate of about 2.4%, further signaling a cooling economy.
Despite this slowdown, the labor market has remained resilient overall. However, October's nonfarm payrolls report showed a modest increase of 12,000 jobs, attributed partly to disruptions from weather-related storms and ongoing labor strikes. The uptick in jobless claims in recent weeks has raised concerns about the sustainability of strong employment gains, though the job market remains fundamentally robust compared to historical norms.
The shift in focus comes as inflation continues to be a challenge for U.S. households. While headline inflation has cooled to 2.1% year-over-year, core inflation (which excludes volatile food and energy prices) remains higher at 2.7%. This persistence of core inflation is a critical issue for the Fed as it attempts to guide the economy toward long-term stability.
The Politics Behind the Decision
The Fed’s decision also comes against a changing political backdrop, with the 2024 U.S. elections having taken place just before the meeting. While the election outcome, with President-elect Donald Trump’s victory, has raised questions about how the incoming administration might impact inflation and economic policy, Fed officials have emphasized that their decisions are based on economic data, not political considerations.
At his press conference, Chair Powell made it clear that while political shifts may impact the broader economy, the Fed’s monetary policy will remain independent. He also stated that he would not step down if requested to do so by the new president, underscoring the Fed’s commitment to its dual mandate of promoting price stability and maximum employment.
Looking Ahead: What’s Next for the Fed?
With the November rate cut behind it, the Fed’s next move will likely be shaped by incoming economic data, particularly around inflation and the labor market. While the current outlook points to further rate cuts in the near term, there is still uncertainty about how far the Fed will go.
Markets are now speculating that the Fed may implement another 25 basis point rate cut in December 2024, bringing the federal funds rate closer to 4.25%. This move would likely follow the same cautious, data-driven approach that has characterized the Fed's actions over the past several months.
The CME Group’s FedWatch tool suggests that traders expect the Fed to pause further cuts in January 2025 to assess the impact of the policy adjustments made in the second half of 2024. However, questions remain about what the “terminal rate” (the point at which the Fed will stop cutting) will ultimately be. The September “dot plot” indicated a terminal rate of around 2.9%, which implies potential cuts in 2025 and possibly 2026.
Impact on Borrowers and Financial Markets
The Fed's decision to lower rates, while generally aimed at supporting economic growth, also has significant implications for borrowers and financial markets. With lower interest rates, consumers are likely to see reduced rates on mortgages, credit cards, and auto loans, providing relief to households and businesses as the cost of borrowing decreases.
However, while lower interest rates should, in theory, lower borrowing costs, Treasury yields and mortgage rates have recently increased. The 30-year mortgage rate, for example, has risen by nearly 0.7 percentage points to around 6.8%, even as the Fed eases its policy stance. This increase in rates could dampen the impact of the Fed's cuts on the broader economy, especially in housing.
Conclusion: What Does the Future Hold?
The Federal Reserve’s November 2024 rate cut is part of a broader strategy to recalibrate monetary policy amid an evolving economic landscape. With inflation showing signs of moderation and the labor market softening slightly, the Fed is taking a more measured approach, shifting its priorities toward supporting employment and maintaining growth.
Looking ahead, the Fed's December 2024 meeting will be critical in determining the next steps for monetary policy. Markets will closely watch the latest labor market reports and inflation data to assess whether the Fed will continue its cautious path of rate cuts or pause to evaluate the full effects of its policy adjustments.
For now, the central bank’s approach seems aimed at achieving a soft landing for the economy—one that brings inflation under control while avoiding a recession. As we move into 2025, the Fed’s careful balancing act will likely continue, with policymakers closely monitoring economic developments to guide their next moves.
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