In a significant move aimed at steering the economy towards stability, the Federal Reserve's monetary policy committee made headlines on Wednesday by lowering its benchmark lending rate by 50 basis points, marking the first rate cut since March 2020. This adjustment comes amidst an ongoing strategy to combat inflation which necessitated tightened monetary policy from March 2022 until July 2023. The Federal Open Market Committee (FOMC) has now reduced interest rates to a target range of 4.75% to 5%, while the broader market consensus had predicted a slightly higher range of 5% to 5.25%.
This decision underscores a growing confidence among policymakers that inflation trends are moving towards the Fed's target of 2%. In a statement released following their two-day meeting, the FOMC emphasized that they perceive the risks associated with achieving both employment and inflation targets to be roughly balanced.
They acknowledged the prevailing uncertainty in the economic outlook, demonstrating awareness of potential risks that could impact their dual mandate. Recent economic indicators indicate that the activity level in the US economy is expanding at a "solid" rate. Employment growth has shown signs of deceleration; however, the unemployment rate remains low, despite a slight uptick.
The committee stated, "In considering additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks," reflecting a commitment to evaluating future conditions before making further changes. The updated Summary of Economic Projections from the FOMC has led to a revision in their median federal funds rate forecast ranging from 2024 through 2026.
The Fed now anticipates the rate to settle at 4.4% by the end of this year, a drop from the previously forecasted 5.1% in June. Projections for the following years show a decline to 3.4% from 4.1% for 2025, and a slight reduction to 2.9% from 3.1% for 2026. Moreover, policymakers have adjusted their expectations regarding unemployment rates for the same period, bringing the projected rate to 4.4% this year, an increase from June’s forecast of 4%.
The revised outlook continues with a projection of 4.4% for 2025, up from the earlier figure of 4.2%, and a 2026 estimate pegged at 4.3%, slightly higher than the previous prediction of 4.1%. Although not publicly acknowledged by the Fed, experts like Ryan Sweet, Chief US Economist at Oxford Economics, suggest that the dual mandate of the Fed may be shifting towards a singular focus due to a softening job market, reflecting broader concerns regarding labor demand that might intensify stress in the labor sector. The Fed has also revised its inflation outlook, as indicated by core personal consumption expenditures (PCE), downgrading estimates for this year to 2.3% from 2.6% and for 2025 to 2.1% from 2.3%.
Core PCE, which specifically excludes volatile food and energy prices, is now projected at 2.6% for 2024, a decline from the June forecast of 2.8%, with estimates for 2025 lowering to 2.2% from 2.3%. Furthermore, the FOMC has lowered its growth outlook for the US economy for 2024 from 2.1% to 2%, while maintaining its forecast of 2% growth for both 2025 and 2026. As the financial landscape continues to evolve, the next scheduled meeting of the FOMC will occur on November 6-7, during which further adjustments may be deliberated based on an ongoing assessment of economic conditions..