Fed closes 2024 with cut
As expected, the Federal Reserve cut interest rates for the third time this year, lowering its benchmark fed funds rate by 0.25% to a target range of 4.25%-4.5%—its lowest level since February 2023:
Source (data): Federal Reserve. Values represent upper end of Fed funds target range. (For illustrative purposes. Not a recommendation.)
From March 2022-July 2023, the Fed attempted to cool the economy and combat accelerating inflation by raising rates from zero to 5.25%-5.5%. While the Fed’s goal during this hiking cycle was to reduce inflation without triggering a recession, its challenge now is to lower rates without overheating the economy and reigniting inflation.
When the Fed lowers rates, auto loans, credit card rates, and mortgages typically become more affordable, while companies usually pay less to borrow money. That can encourage both consumers and businesses to spend, which may then spur the economy. However, most rates are higher now than they were in September when the Fed began its easing cycle, in part because the economy has persistently outperformed expectations and recession concerns have eased.
The markets are wondering whether tariffs and related policies may reignite inflation—and slow the pace of Fed rate cuts.
One question now facing the markets is whether proposed tariffs and other potential Trump administration policies could trigger another inflation surge, and whether this would cause the Fed to slow its rate-cutting campaign.
According to Morgan Stanley & Co. strategists, there’s still a great deal of uncertainty regarding what the new administration will actually try to implement. As the analysts explain, there are plenty of examples from the first Trump term of actual policy—including tariffs on China and corporate tax rates—differing significantly from what the president initially proposed.1
That said, the market has downsized its expectations for future rate cuts, forecasting the Fed will leave rates unchanged at its January meeting and deliver a total of two cuts next year.2
While inflation hasn’t been hot in recent months, it’s been “stickier” than expected. The Fed’s preferred gauge, the “core” PCE Price Index (which excludes food and energy prices) came in at 2.8% last month and hasn’t decreased since June, although it’s down significantly from its 2022 high of 5.65%. The next release will be on Friday.
Note: The Fed’s next policy meeting is scheduled for January 28-29.
1 MorganStanley.com. What Investors Should Know About Trump’s Tariffs. 12/4/24.
2 CMEGroup.com. FedWatch Tool. 12/18/24.