The Federal Open Market Committee said in its statement Wednesday that it has "increased confidence that inflation will move toward 2 percent on a sustained basis and judges that risks to the achievement of our employment and inflation objectives are roughly balanced." It also acknowledged that while the job market has cooled, "economic activity continues to expand at a solid pace."
Wednesday’s rate cut was widely expected, but markets have endured months of uncertainty amid mixed economic data.While inflation has cooled sharply since hitting a 40-year high in the summer of 2022, the Fed has insisted it won’t ease policy until it’s convinced that overheated price pressures are indeed abating.Inflation, as measured by the personal consumption expenditures price index, the Fed’s preferred measure, was 2.5% in July, not far from the Fed’s long-term 2% target.
The Fed "may be shifting its focus now to avoid stressing the economy by keeping rates too high for too long -- in other words, they want to keep the possibility of achieving their desired soft landing alive," said Dominic J. Pappalardo, chief multi-asset strategist at Morningstar Investment Management. "Recent economic data suggest that the economy remains relatively strong compared to other easing periods, with unemployment at 4.2%, up year-over-year but at full employment, and annual GDP growth of 3.0% through the second quarter of 2024."
Recent data pointing to a cooling labor market has sparked a debate among investors and analysts over the scope of the first rate cut in the easing cycle, with bond futures markets vacillating between expectations of a 25 basis point or 50 basis point cut.
The Fed is widely expected to cut rates further by the end of this year and into 2025. However, Caldwell said the Fed may not be so aggressive in cutting rates from now on.
“The latest FOMC member projections suggest that the federal funds rate will be lowered by a quarter percentage point each at the November and December 2024 meetings, and then by another percentage point in 2025, bringing the federal funds rate to 3.25-3.50% by the end of 2025,” Caldwell said. “This is actually slightly above recent market expectations of 2.75-3.00% by the end of 2025. From that perspective, today’s news is not exactly a move in the direction of accommodative monetary policy.”
