Fed delivers
As expected, the Federal Reserve cut interest rates for the second time this year, lowering its benchmark fed funds rate by 0.25% to a target range of 4.5%-4.75%:
Source (data): Federal Reserve. Values represent upper end of Fed funds target range. (For illustrative purposes. Not a recommendation.)
The move dropped the fed funds rate to its lowest level since March 2023.
When the Fed lowers rates, auto loans, credit card rates, and mortgages typically become more affordable, while companies pay less to borrow money. That can encourage both consumers and businesses to spend, which may then spur the economy.
From March 2022 to July 2023, the Fed raised rates from zero to a nearly 16-year high of 5.25%-5.5% to subdue accelerating inflation in the wake of the 2020 COVID shutdowns, as supply chain disruptions and aggressive government spending initiatives drove prices higher throughout the economy.
While the Fed’s goal during the hiking cycle was to lower inflation without tipping the economy into recession, now they face a different challenge: lowering rates without reigniting inflation. Near the end of October, the PCE Price Index showed inflation increased 2.1% in September—very close to the Fed’s 2% target level. But the Fed’s preferred gauge, the “core” PCE reading (which excludes food and energy prices) was 2.7%, and has not decreased since June, although it’s down significantly from its 2022 high of 5.65%.
While economic growth and the labor market have been more resilient than many market watchers had expected, both have cooled over the past 18 months.
While economic growth and the labor market have been more resilient than many market watchers had expected, both have cooled over the past 18 months. On balance, concerns that the Fed risks reigniting inflation if it cuts rates too aggressively still appear to be taking a back seat to concerns of it being “behind the curve”—that is, not cutting rates quickly enough to prevent the economy from slipping into a recession.
Note: The Fed’s next policy meeting is scheduled for December 17-18.