Heritage Research Fellow and economist EJ Antony joins ‘The Big Money Show’ to discuss reports that the Federal Reserve is likely to cut rates for the third time this year.
federal Reserve It announced its third consecutive interest rate cut on Wednesday, slashing the benchmark rate by 25 basis points amid economic data that showed inflation remained above the central bank’s target rate.
With the 25-basis-point cut, the benchmark federal funds rate will sit at a range of 4.25% to 4.5%. The Fed’s move follows a 25 basis point cut in November and a larger-than-usual rate cut of 50 basis points at its September meeting, which was the first rate cut since March 2020 and brought them below the 5.25% threshold. . Up 5.5% – the highest level since 2001.
The Federal Open Market Committee (FOMC), the group within the Fed responsible for setting monetary policy, said in a statement that “labor market conditions have generally eased, and the unemployment rate has increased but remains low” and Whereas inflation has increased Towards the 2% objective, it “remains somewhat high.”
“The Committee seeks to achieve maximum employment and inflation at 2 percent over the long term. The Committee believes that the risks to achieving its employment and inflation targets are approximately in balance. The economic outlook is uncertain, and the Committee remains vigilant to the risks on both sides of its dual mandate,” the FOMC said.
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Fed Chairman Jerome Powell announced on Wednesday that the central bank is reducing interest rates by 25 basis points. (Alex Wong/Getty Images)
Cleveland Fed President Beth Hammack, a member of the FOMC, disagreed with the decision to cut rates and preferred to keep the benchmark rate in the 4.5% to 4.75% range.
FOMC also released its summary economic projectionsThat reflected two rate cuts in 2025, two cuts in 2026 and one cut in 2027. Earlier in its most recent projection from September, it had forecast four cuts in 2025.
The summary shows the federal funds rate averaging at 4.4% in late 2024, before falling to 3.9% in 2025, 3.4% in 2026 and 3.1% in 2027. Those forward-looking projections are higher than the Fed’s September estimates, with the 2025 and 2026 medians each half a point higher and the 2027 figure 0.2 percentage points higher.
It also forecast that the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, will end at 2.4% this year and 2.5% in 2025 – up from 2.1% in the previous projection released in September. In the longer run, PCE will decline to 2.1% in 2026 before reaching 2% in 2027.
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“Today was a close call, but we decided it was the right call because we thought it was the best decision to promote the achievement of both of our goals, maximum employment and price stability.” Fed Chairman Jerome Powell Said in a press conference.
“We see the risks as two-sided – moving too slowly and unnecessarily weakening economic activity and the labor market, or moving too fast and unnecessarily weakening our progress on inflation. So we look at those two.” “Trying to walk the line between the risks, we decided to move forward with another cut,” he explained.
Powell said the Fed would monitor the labor market and inflation data before its next decision on interest rates. (Liu Jie/Xinhua/via Getty Images)
Powell said downside risks to the labor market have diminished, but noted that the labor market is looser than before the pandemic and is continuing to cool, which is not needed to bring inflation down to the 2% target. He also said the pace of decline in inflation had slowed compared to last year partly because housing services inflation was falling at a slower pace than expected, with some “bounce” in commodity prices.
“We have combined this decision today with the range and timing language in the post-meeting statement that signals that we are at or near a point where it would be appropriate to slow the pace of further adjustment,” Powell said. “
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The Fed chair responded to a question about what policymakers would consider in the new year on future rate cut decisions, with the Fed’s economic projections indicating fewer rate cuts in 2025 than previously thought.
“We are very close to neutral and transitioning to 4.3%, we believe policy is still meaningfully restrictive, but as far as additional cuts go, we look at further progress on inflation as well as the labor market.” “We are expecting continued strength.” ” He explained. “And as long as the economy and labor market are solid, we can remain cautious as we consider further cuts and all of this is reflected in the December SEPs, which have about two next year compared to four in September. The average forecast of cuts is shown. ,
“The US economy is performing very, very well – much better than our global peer group – and there is no reason to think that a recession is any more likely than usual. So the outlook for our economy is quite bright. We remain However, we will continue to work on restrictive policies to get inflation down to 2%. We are also going to keep an eye on the labor market which is very close to that,” Powell said.
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Federal Reserve policymakers are projecting fewer rate cuts next year. (Via Ting Shen/Bloomberg/Getty Images)
The Speaker also discussed the impact of inflation in recent years American consumerDespite inflation slowing from a 40-year high of 9.1% in June 2022 to 2.7% in November 2024, prices are about 20% higher than four years ago.
“I think what people are feeling right now is the impact of higher prices, not higher inflation. We understand very well that prices have gone up too much, and people really feel that and that food And there are prices for transportation and heating your home and things. “So there’s been tremendous pain in that burst of inflation that was very global,” Powell said.
markets fell In response to the Fed’s decision, the S&P 500 fell more than 1.7% and the Dow fell more than 1.4% in the final hour of trading. The likelihood that the Fed will halt its rate-cutting when it meets on January 28-29 was largely unchanged in response to the Fed’s decision, with a 96.5% chance that rates will remain at the new range of 4.25% to 4.5% next month. There was little change from Tuesday, according to the CME FedWatch tool.
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“The Fed has been able to cut rates by 100 basis points so far this cycle, but given the pace of the economy and recent increases in inflation, it will be more difficult for the Fed to provide a basis for continuing to cut rates. At the same pace,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.
“The other reality is that Powell and Co. cannot afford to be wrong again on inflation because the upside risk remains persistent,” he said. “So, we see the bar for rate cuts being pushed further from here and given that the Fed is operating at a data-dependent level, any meaningful increase in inflation increases the risk that additional rate cuts Cuts, if any, will be few and far between.”
“In many ways, today’s cuts and the release of updated expectations for 2025 signal a strong vote of confidence in the current state of the economy and job market. And that optimism may be down to business leaders who are looking to accelerate hiring. ,” said Corey Stahle, economist at Indeed Hiring Lab.
“There is still much uncertainty regarding the impact of any new policies implemented by the incoming administration, and there is no guarantee that the current market momentum can or will be sustained over the medium or long term. But no Not a big surprise, Labor’s Stahle said, “The market looks poised to enter 2025 with solid momentum and headwinds.”
