Monthly Economic Insights
With inflation near target, the Fed cuts interest rates and shares its positive outlook on other indicators
At the most recent Federal Open Market Committee meeting on September 18, 2024, The Federal Reserve decided to lower interest rates by 50 basis points to a target range of 4.75% to 5.0%, marking its first rate cut in four years.
This policy shift reflects the Fed’s view that the softening labor market now poses a greater risk than inflation, prompting a new stance to head off a sharp slowdown in employment.
The Fed also reiterated its commitment to achieving maximum employment and maintaining inflation at its long-term goal of 2%. While inflation moderated again in August to 2.5%—closer to the Fed’s target—the labor market has shown more signs of slowing. The Committee revised its description of job gains from “moderating” to “slowing”, further signaling the Fed’s shift in focus from controlling inflation to stabilizing employment.
The Fed’s Summary of Economic Projections shows more positivity in general among members. Most telling, they anticipate further rate cuts soon, with an additional 50 basis points of cuts by the end of 2024, followed by 100 basis points of cuts in 2025 and 50 more basis points in 2026, with rates expected to stabilize around 2.9% by 2027.
The Fed doesn’t expect the unemployment numbers to improve until they get slightly worse as they are projected to increase, with the median forecast for 2024 rising to 4.4% from the current 4.2%. This modest uptick is seen as a necessary adjustment as the economy continues to respond to tighter monetary conditions that won’t be alleviated entirely by the latest interest rate cut.
Fed Chair Jerome Powell emphasized the central bank’s focus on supporting maximum employment as inflation moves closer to the 2% target. Powell noted that while inflation remains a priority, the labor market’s rapid cooling has shifted the Fed’s attention toward preventing a more severe slowdown.
In other good news, projections on GDP remained steady and positive, with estimates ranging from 1.8% to 2.6% for the remainder of 2024.
Bottom Line: The impact of tighter monetary policy seemed clear, and officials felt compelled to ease, but the results are far from certain at this point. While layoffs remain low, the pace of hiring has slowed considerably. The ratio of job vacancies to unemployed workers has dropped to under 1.1, down from 1.25 pre-pandemic and a high of 2.0 when the Fed began raising rates in March 2022. Further deterioration could cause widespread unemployment jumps, but this cut should help protect against that.
Also, sectors sensitive to interest rates, such as manufacturing and real estate, have shown weakness and could benefit from easing as well. Meanwhile, more corporations report that low- and middle-income consumers are pushing back against rising prices, forcing companies to offer more discounts and promotions. The fundamentals still appear solid, but concerns remain, and the timing of the Fed’s rate cut has been well received by markets.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
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