The Federal Reserve is ready to implement its final interest rate decrease for the time being.
The Federal Reserve is ready to implement its final interest rate decrease for the time being.
The American economy continues to demonstrate resilience, with the workforce maintaining stability and economic growth progressing. However, recent months have seen a potential halt in inflation reaching the Federal Reserve's 2% target. The overall economic data suggests that the Fed might not be in a hurry to reduce interest rates following this week's events, a stance recently expressed by the Fed's leader.
Fed Chair Jerome Powell commented in New York earlier this month that a more cautious approach is warranted. He expressed satisfaction with the current state of the economy and monetary policy. Powell will brief the press in a news conference at 2 p.m. ET, with investors eagerly tuning in for signs hinting at interest rates remaining stable in the near future.
This week, the Federal Reserve is expected to release updated economic predictions, likely reflecting fewer interest rate decreases in 2025 compared to initial expectations. In September, the forecast indicated four rate cuts for the upcoming year.
The Federal Reserve initated rate reductions in September, starting with a substantial half-point decrease. Powell explained that the move aimed to safeguard the labor market's health, appeasing investors concerned about potential unemployment surges.
However, neither the economy nor the job market displayed any significant weakness, as Powell highlighted in his New York speech. Nevertheless, Wall Street is anticipating the Fed to implement another quarter-point rate cut this week.
Karl Schamotta, Corpay's chief market strategist, remarked to CNN that the Fed faces a delicate predicament with this rate cut.
So, why is the Fed lowering rates?
The Federal Reserve's key interest rate impacts borrowing expenses throughout the economy and is used to maintain stable prices and maximum employment, two primary objectives mandated by Congress. The central bank raises interest rates to manage inflation and cool the economy if inflation is high.
With inflation approaching the Fed's target and a softening job market, officials have been attempting to adjust policy to prevent excessive borrowing costs from harming the economy. The two rate reductions so far marked the initiation of this adjustment process.
Fed Governor Christopher Waller noted during an event in Washington, DC, early this month that further rate cuts are necessary to ensure that high borrowing costs don't cause undue damage to the economy. Waller emphasized that the labor market appears to have reached equilibrium and that the Fed should aim to maintain this balance.
The US labor market manifests strength, with unemployment remaining historically low and employers continuously adding jobs. However, job seekers encountered more challenges in finding employment in recent months. The number of long-term unemployed individuals rose in November to its highest level in nearly three years.
Eugenio Aleman, chief economist at Raymond James, told CNN that the labor market has shown some weakening and that inflation is expected to remain low during the first two quarters of the following year. This is why further rate reductions are being implemented, but a more optimistic outlook is anticipated after that.
The looming uncertainty is President-elect Donald Trump's upcoming second term, beginning on January 20, and how his proposed policies might affect the US economy. The proposed significant tariffs on imports from Mexico, Canada, and China are widely expected to eventually boost inflation, potentially preventing further rate cuts or even leading to an increase in interest rates.
However, numerous variables remain unclear, such as which specific goods will be subjected to tariffs and the duration of any new duties. The Federal Reserve will take these changes into account once they have been fully established and put into motion.
Signs of inflation plateauing?
Recent inflation data has displayed limited advancement.
The renowned Consumer Price Index increased by 2.7% in the 12-month period ending in November, accelerating from October's 2.6% annual ascent and representing the highest annual rate since July. The annual figure was in line with economists' predictions.
Meanwhile, the Producer Price Index, which measures prices at the manufacturing level, climbed 0.4% on a monthly basis and 3% for the 12-month period ending in November, reflecting a sharp increase compared to October.
The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures price index, is set to be released on Friday and may illustrate persistent price pressures.
The latest inflation data will likely not deter the Federal Reserve from delivering this year's third rate cut, but it could underscore the volatility of inflation's journey towards the 2% target. Further inconsistencies in this trend might cause officials to acknowledge that further progress on inflation has stagnated, as they did earlier this year, maintaining interest rates steady until the situation improves.
The quarterly "dot plot," which shows Fed officials' predictions on rate adjustments, may provide the most insightful indication of the central bank's plans for 2025.
The Federal Reserve's decision to lower interest rates is aimed at maintaining stable prices and maximum employment, which are the central bank's primary objectives as mandated by Congress. Businesses and individuals in the economy rely on these interest rates and any changes can impact their borrowing expenses.
Following recent months of potential halt in inflation reaching the Fed's 2% target, certain business sectors might welcome the rate cuts as a way to reduce their borrowing costs. However, the overall economic data suggests that the Fed might not be in a hurry to reduce interest rates further due to signs of a resilient economy and stable workforce.