Fed Cuts Interest Rates for Second Time in 2024
The Federal Reserve reduced interest rates by 25 bp today two days after Donald Trump’s stunning election win.
In a widely anticipated move, the Federal Reserve announced its second interest rate cut in 2024 on Thursday, opting to lower the federal funds rate by 25 basis points. This decision places the rate in a range of 4.5% to 4.75%, a strategic move aimed at bolstering economic stability amid complex economic indicators that show both progress in inflation control and emerging signs of labor market softening.
This quarter-point reduction follows the larger 50-basis-point cut in September, which marked the Fed’s first rate adjustment since early 2020. Federal Reserve Chair Jerome Powell explained that the shift reflects a delicate balancing act between two primary economic objectives: curbing inflation and supporting employment.
“As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals,” Powell stated during a press briefing.
Economic Context and Challenges
The rate cut comes at a time when inflation has shown signs of cooling, inching closer to the Fed’s 2% target. The Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, reported a 2.1% increase in September, which suggests inflation is nearing a manageable level. However, core inflation—excluding volatile food and energy prices—remains stubbornly high at 2.7%, an indication that underlying inflationary pressures persist.
Labor market dynamics also influenced the Fed’s decision. Although the US unemployment rate has risen slightly over the past year, it remains relatively low at 4.1%. Yet, recent job reports reflect some volatility. The October report revealed that only 12,000 jobs were added, a figure partially attributed to temporary disruptions such as labor strikes and hurricanes. These mixed signals have complicated the Fed’s decision-making process, as Powell noted.
A Measured Path Forward
The Fed’s rate cuts reflect its attempt to transition to a “neutral” policy stance that neither excessively stimulates nor restricts economic growth. This transition requires a careful pace to avoid reigniting inflation while maintaining enough economic support to sustain employment.
“If the economy remains strong and inflation is not sustainably moving toward 2%, we can dial back policy restraint more slowly. If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can move more quickly,” explained Powell.
The gradual approach is designed to avoid the risk of both over- and under-reacting. Reducing rates too rapidly could trigger inflationary pressures while moving too slowly might stall growth and damage employment opportunities. Powell indicated that the Fed’s strategy is to navigate these risks carefully, aiming for a “soft landing” where inflation declines without sparking a recession.
The Fed’s statement highlighted that “the risks to achieving its employment and inflation goals are roughly in balance,” underscoring the committee’s assessment that the current economic strategy effectively supports both objectives. The unanimous vote among committee members reflects a cohesive view on the need for moderation in the pace of rate adjustments.
Market Response and Future Outlook
Financial markets responded favorably to the Fed’s announcement. The tech-heavy Nasdaq rose 1.5%, while the S&P 500 reached a record high. Meanwhile, Treasury yields, which had surged in recent days, fell after the announcement. Despite the Fed’s rate cuts, long-term interest rates—such as those for mortgages—remain high due to investor concerns about persistent inflation.
The Fed’s next policy meeting is scheduled for December, and while another quarter-point cut is anticipated, Powell made it clear that each decision will be “data-dependent.” Analysts suggest that the Fed could adopt a pause early next year if inflation trends closer to the target, allowing policymakers to assess the impact of the recent cuts.
The uncertainty surrounding the Fed’s path forward has been compounded by the changing political landscape. President-elect Donald Trump’s policies, including proposed tariffs and changes to immigration, have led to speculation that inflation could rise due to potential disruptions to supply chains and labor markets.
When asked about how Trump’s policies could influence the Fed’s decisions, Powell replied:
“We don’t guess. We don’t speculate. We don’t assume.”
He stressed that the Fed’s decisions are guided strictly by economic data, not political considerations.
Powell also dismissed speculation about stepping down if asked by Trump. When asked if he would comply with such a request, he responded with a firm “No,” reaffirming his commitment to the Fed’s independence.
Balancing Growth and Stability
The Fed’s cautious approach reflects its intent to strike a balance between fostering economic growth and ensuring price stability.
As Powell concluded:
Again, the idea is to maintain, to support the strength that we have in the labor market and the economy, but also with somewhat less restrictive but still restrictive policy, enable progress towards our 2% goal. So this is a thing where meeting-by-meeting we’re going to be making our assessment about what the right path is.”
The Federal Reserve remains focused on a “steady-as-she-goes” policy, positioning itself to respond flexibly to economic shifts while maintaining an eye on the long-term objectives of stability and growth.
Stock Market Activity
This afternoon’s rate cut by the Fed combined with the post-election Trump bump saw markets rally for the second day in a row.
The S&P 500 Index (SPX) rose 0.74% on Thursday, closing the day at 5,973.10, while the NASDAQ Composite (NASX) ended the day up 1.51% at 19,269.46.
Following its stunning 1,500-point rise on Wednesday, the Dow Jones Industrial Average (DOWI) closed Thursday’s trading session down 0.0013% at 43,729.34.
The SPDR SP 500 ETF Trust (NYSE Arca: SPY) climbed 0.77%, finishing the day at $595.61.
The Russell 2000 Small-Cap Index (RUT) declined 0.43%, closing the day at 2,382.69, while the Russell 2000 Ishares ETF (IWM), sank 0.35%, closing Thursday at $236.38.
The Russell Microcap Index (RUMIC) closed the day at 844.80, down 0.63%.
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