Federal Reserve Rate Cut – September 2024
Last Wednesday, the U.S. central bank initiated an expected sequence of interest rate cuts by implementing a larger-than-usual half-percentage-point reduction. Federal Reserve Chair Jerome Powell stated that this action was intended to demonstrate policymakers’ dedication to maintaining a low unemployment rate, especially in light of the recent decrease in inflation.
“We made a good strong start and I am very pleased that we did,” Powell said at a press conference after the Fed, noting its increased confidence that the country’s high inflation was over, reduced its benchmark policy rate by 50 basis points to the 4.75%-5.00% range. “The logic of this both from an economic standpoint and from a risk management standpoint was clear.”
Federal Reserve policymakers anticipate that the benchmark interest rate will decrease by another 0.5% by the end of this year, followed by a 1% decrease next year, and a 0.5% decrease in 2026. However, they acknowledged that the long-term forecast is inherently uncertain.
This shift indicates a notable change in U.S. monetary policy and reflects the Fed’s increasing confidence in inflation gradually returning to its target, which currently stands approximately 0.5% above it.
The Fed’s policy decision, which came just seven weeks before the U.S. presidential election, didn’t elicit a strong reaction from the presidential candidates, at least not initially.
Vice President Kamala Harris, the Democratic presidential candidate, called the rate cut “welcome news” for Americans. “I know prices are still too high for many middle-class and working families,” she said in a statement.
Republican nominee Donald Trump, who as president first appointed Powell to lead the Fed, said the size of the cut suggested the economy may be in trouble.
“To cut it by that much, assuming they’re not just playing politics, the economy would be very bad,” Trump told reporters.
Powell, however, said the economy was still robust, citing various job market indicators such as unemployment claims and the 4.2% unemployment rate, which are not at concerning levels. However, he recognized the concerns raised by economists and analysts regarding inflation. He mentioned that it takes time for monetary policy changes to make a difference. Additionally, he noted that officials felt the need to take action to prevent further labor market weakness, similar to the arguments for swift action to address inflation, based on anecdotal information from companies and slowed hiring rates. “There is thinking that the time to support the labor market is when it is strong, and not when you begin to see layoffs,” Powell said.
The Fed had kept its policy rate in the 5.25%-5.50% range since last July when it ended an 18-month rate-hike campaign that was meant to control a surge in inflation, which soared in 2022 to a 40-year high.
Powell declined to declare victory on that front, but he did say inflation is now near the Fed’s 2% goal, and labor conditions are consistent with the central bank’s other goal of maximum employment.
U.S. stocks gained following the release of the statement and updated quarterly economic projections before reversing course to close lower on the day. The U.S. dollar opened a new tab and was slightly stronger against a basket of currencies, while yields on U.S. Treasuries rose.
Rate futures traders moved to price in even more easing than projected by the Fed, with the policy rate now expected to be in the 4.00%-4.25% range by the end of this year.
“The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 basis points and expect another 50 basis points of cuts this year. This was controversial,” said Brian Jacobsen, chief economist at Annex Wealth Management.
The current inflation rate, as per the Fed’s preferred measure, is slightly above 2%. According to the latest economic projections, the annual increase in the personal consumption expenditures price index is expected to decrease to 2.3% by the end of this year and further down to 2.1% by the end of 2025. The unemployment rate is projected to remain at 4.4% throughout 2025. Economic growth is anticipated to be 2.1% through 2024 and 2% next year, which aligns with the previous projections issued in June.
For international solar mounting industry, the Fed’s rate cut can bring growth potential. Lower borrowing costs can enhance both local and international solar infrastructure projects, making it easier to finance and expand operations. As renewable energy continues to be a global priority, this economic shift could drive new opportunities for solar solutions providers.
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Sources: WASHINGTON, Sept 18 (Reuters)
