Federal Reserve Cuts Interest Rates by 0.25%: Softening Labor Market and Easing Inflation Pave Way for More Rate Cuts Through 2026

Federal Reserve Cuts Interest Rates by 0.25%

On November 7, 2024, the Federal Reserve announced a 0.25% reduction in its federal funds rate, bringing it to a range of 4.5% to 4.75%. This move was widely anticipated and is seen as a response to a cooling labor market and easing inflation. Financial markets, including equities, industrial commodities, and bonds, are expected to benefit from the rate cut, while the U.S. dollar is likely to face downward pressure. The decision is part of the Fed's broader strategy to support economic growth while maintaining price stability.

During a press conference following the Fed’s announcement, Chair Jerome Powell was questioned about the timing of future rate cuts, particularly in light of the 2024 U.S. elections. Powell avoided political questions but reaffirmed the Fed's focus on inflation and employment. Analysts are now forecasting additional rate cuts, with Prestige Economics predicting another 0.25% reduction in December 2024, followed by further cuts in 2025 and 2026. These expectations align with the Federal Open Market Committee's (FOMC) projections from September 2024.

The FOMC's September projections indicated that the federal funds rate could decline to 4.4% by the end of 2024, 3.4% by 2025, and 2.9% by 2026. Although these projections are subject to change, they suggest that the Fed intends to continue easing monetary policy in response to shifting economic conditions. With inflation decelerating and the labor market stabilizing, the Fed is likely to prioritize supporting economic activity through further rate cuts.

The Fed operates under a dual mandate to maintain full employment and stable prices. While inflation remains above the central bank's 2% target, it has been cooling in recent months. Key inflation indicators, such as the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index, have shown signs of moderation. In September 2024, year-on-year CPI was 2.4%, with core CPI at 3.3%. The total PCE was at 2.1%, and core PCE at 2.7%. The downward trend in these inflation measures supports the possibility of further rate cuts.

The labor market, while showing signs of easing, remains strong overall. The unemployment rate increased slightly to 4.1% in October, but with millions of job openings still available, the job market is far from weak. This balance of a healthy labor market and cooling inflation provides the Fed with the flexibility to reduce interest rates further, should inflation continue to slow.

Looking ahead, the Federal Reserve's ongoing rate cuts are expected to bolster economic growth by supporting business investment and consumer spending. A more dovish monetary policy is likely to boost market confidence and help stabilize financial markets. While uncertainties remain, particularly with global economic risks, the Fed's policy stance points toward further easing in 2025 and beyond, provided inflation continues to trend downward. The coming months could see more aggressive rate cuts if inflationary pressures continue to subside.

Federal Reserve Cuts Interest Rates by 0.25%: Softening Labor Market and Easing Inflation Pave Way for More Rate Cuts Through 2026