Live Updates: Markets Plunge After Fed Signals Fewer Rate Cuts Next Year
The Federal Reserve cut interest rates by a quarter point, its third reduction this year, but suggested only two more reductions next year as inflation lingers.
Where Fed Officials Expect Rates Will Be
Actual
target rate
Latest
projections
6
%
5
4
3
Each dot represents what one Fed official thinks the target rate should be at the end of this year and the next.
2
1
0
’21
’22
’23
’24
’25
Actual
target rate
Latest
projections
6
%
5
4
3
Each dot represents what one Fed official thinks the target rate should be at the end of next year.
2
1
0
’21
’22
’23
’24
’25
Federal Reserve officials made their third and final rate cut of 2024 at their meeting on Wednesday. They also forecast two fewer rate reductions in 2025 than they had previously expected, as inflation lingers and the economy holds up.
The Fed has come a long way from just a few years ago: In 2022, inflation was more than twice its current rate and many economists thought that the central bank’s decisions might cause economic pain — and even a recession — as it rapidly lifted interest rates to slow demand and wrestle price increases back under control.
That didn’t happen. The job market slowed without falling apart, and inflation cooled so substantially that the Fed was able to begin cutting interest rates in September.
But the Fed is now entering a new phase in its journey toward an economic soft landing.
Officials thought that it was clear that rates needed to come down notably from their 5.3 percent peak, and they have steadily lowered them to about 4.4 percent by making three back-to-back reductions. Policymakers do not want to cut rates so much that they reignite the economy, though — and they have now arrived at a point where it is uncertain how much further rates should fall.
“Our policy stance is now significantly less restrictive,” Jerome H. Powell, the Fed chair, said during a news conference on Wednesday. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
“From here, it’s a new phase,” Mr. Powell later added.
The Fed’s forecasts make clear that central bankers are poised to slow rate cuts notably over the next several years as stubborn inflation lingers.
Where Fed Officials Expect Rates Will Be
Actual
target rate
Latest
projections
6
%
5
4
3
Each dot represents what one Fed official thinks the target rate should be at the end of this year and the next.
2
1
0
’21
’22
’23
’24
’25
Actual
target rate
Latest
projections
6
%
5
4
3
Each dot represents what one Fed official thinks the target rate should be at the end of next year.
2
1
0
’21
’22
’23
’24
’25
Fed officials predicted that they will cut rates to 3.9 percent in 2025 in their fresh economic estimates — suggesting that they will make just two rate cuts next year. They had forecast four when they last released economic projections back in September.
They then expect to make two rate cuts in 2026, and one in 2027.
The exact timing of the Fed’s future rate reductions is uncertain, and Mr. Powell made it clear that any moves would be based on incoming data. He suggested that the Fed might hold off on rate cuts if inflation were to get stuck at an unexpectedly higher level.
“For additional cuts, we’re going to be looking for further progress on inflation,” Mr. Powell said on Wednesday.
He also said that further softening in the labor market was “not something we need to see.” But he stopped short of suggesting that the Fed would cut interest rates purely to prevent job conditions from cooling, as it has in recent months.
The Fed chair still had an overall optimistic message for the American public: “The U.S. economy is just performing very, very well — substantially better than our global peer group,” Mr. Powell said. “The outlook is pretty bright for our economy. We have to stay on task, though.”
Stocks slumped, the dollar soared and the cost of borrowing money became more expensive on Wednesday, as the Fed struck a hawkish tone on the economy, despite cutting the short-term interest rates it controls.
The S&P 500 index dropped 3 percent, it’s biggest fall since the start of August. The Russell 2000 index of smaller companies that are more closely tied to the domestic economy tumbled more than 4 percent. The Dow Jones industrial average fell for a 10th-straight day, its longest losing streak since October 1974.
The Federal Reserve lowered interest rates on Wednesday but did so while simultaneously raising forecasts for economic growth next year and dialing down expectations for rate cuts next year and beyond. That meant longer-term measures of interest rates rose, pushing government bond yields higher and pausing the stock market’s post-election rally.
The two-year Treasury yield, which tends to track interest rate expectations, rose 0.1 percentage points, to 4.36 percent, a big move in that market. It was the yield’s biggest jump in more than two months.
As well as balancing inflation that is cooling slowly — a case for keeping rates elevated — and a labor market that is holding up but cracking, a case for lowering rates, the Fed will soon need to take into account policies put in place by the incoming Trump administration.
Those policies are broadly expected to be stimulative for the economy, potentially speeding up inflation again, but details are light and the Fed has publicly said that it is unwilling to factor potential policy proposals into its forecast until those details are known.
“The main takeaway from today’s Fed meeting was that inflation risks are back, and the Fed is clearly concerned,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. He added that “additional rate cuts, if any, will be few and far between.”
The U.S. dollar also sharply strengthened on Wednesday, rising 1.1 percent to its highest level since November 2022 — another sign of continued economic strength, especially compared with other major economies around the world that are facing greater headwinds.
“Caution and patience are clearly required at this stage,” said Seema Shah, chief global strategist at Principal Asset Management.
Advertisement
SKIP ADVERTISEMENTOfficials lowered interest rates for a third and final time this year.
They also predicted that they will cut rates twice in 2025, which is less than the four reductions they had previously expected to make.
Policymakers forecast notably higher inflation in 2025, with price increases closing out the year at 2.5 percent.
Mr. Powell said that future rate cuts will hinge on further progress on inflation.
While Mr. Powell said that the Fed does not think the job market needs to slow further to allow inflation to cool, he also stopped short of saying that the Fed would try to stop it from slowing more with additional rate cuts.
The upshot? We’re in a new phase for monetary policy. After a series of back-to-back rate cuts, how much rates will fall in the future is totally dependent on what happens in the economy.
Thanks for following along today. Before we end this blog, we all would like to take a moment to give a huge thanks to our amazing colleague, Jeanna. This was her final Fed meeting before she heads to Brussels for a new adventure with The New York Times. Jeanna, you are a star. Thank you!
Asked whether he would settle for 2.5 percent inflation, Powell says that no, he would not.
As for a potential rate increase in 2025 to make that happen? “You don’t rule things completely in or out in this world,” Powell said. “That doesn’t appear to be a likely outcome.”
Advertisement
SKIP ADVERTISEMENT
Powell acknowledges that it has “been a bit frustrating” that inflation has cooled more slowly than policymakers had hoped. But he says that, looking over a longer time frame, the economy has performed better on both unemployment and inflation than many people expected just a couple years ago.
And that’s a wrap. Chair Powell has concluded his news conference.
Could higher inflation forecasts over the next few years have to do with the many conflicts percolating around the world, which can particularly impact oil prices? Powell says not. “We monitor geopolitical risks really carefully, but I would say so far nothing has come out of those risks that has been really important for the U.S. economy,” he said.
One question economic reporters get most often is why we write so much about the “core” measure of inflation, which excludes two categories — food and fuel — that matter hugely to everyday Americans. Powell takes a minute to explain: It isn’t that food and fuel don’t matter. It’s that they’re volatile, and so the core measure does a better job of forecasting where overall inflation — including food and fuel — will head in the future.
Advertisement
SKIP ADVERTISEMENTAsked why inflation hasn’t declined as much as he expected, Powell highlights that it declined a lot faster than many people expected, with less labor market pain. He attributes some of the stickiness to technical factors, such as how housing is measured in personal consumption expenditures, the Fed’s preferred inflation measure.
Powell is making an important point here. Lower inflation does not equate to lower prices. Inflation is the pace of price increases, so while that pace is slowing, prices are still rising.
Stocks have continued to slide, with both the Russell 2000 and S&P 500 on course for their worst days since the start of September.
When the Fed cut rates by a half-point in September, policymakers indicated they did so in part out of concern about potential cracks in the labor market. There are similar cracks showing now by some measures, but Powell says he still sees the labor market as solid.
Powell says that further softening in the labor market is “not something we need to see,” but he doesn’t say explicitly that the Fed wants to avoid that outcome.
Advertisement
SKIP ADVERTISEMENT
Powell says that the Fed is not looking for laws to be changed so that the central bank can hold Bitcoin reserves. President-elect Trump been considering creating a Bitcoin “strategic reserve” that would be part of Treasury’s Exchange Stabilization Fund. Powell did not say whether that would be a good idea.
Investors have already priced in the Fed’s renewed forecast for two quarter-point rate cuts next year. But it appears investors expect those cuts to come by the July meeting, before the strength of the economy pushes rates higher again into the end of the year.
Asked if he worries about buoyant stock prices and other financial froth complicating the disinflation picture, Powell says that he doesn’t get too distracted by it. “A lot of things move financial conditions around, but we see the effects we’re hoping to see on the goal variables,” he said, meaning inflation.
The Fed’s economic growth projections are a bit stronger than those that were recently published by the Congressional Budget Office. The Fed’s median forecast for GDP this year is 2.5 percent, compared with an estimate of 2.3 percent by C.B.O. The budget office projects 1.8 percent growth in 2027, while the Fed projects 1.9 percent.
On inflation, the Fed sees inflation as measured by the Personal Consumption Expenditures index declining from 2.4 percent in 2024 to 2 percent in 2027. The C.B.O. projects P.C.E. to decline from 2.4 percent this year to 2 percent in 2027. P.C.E. is the Fed’s preferred inflation measure.
Advertisement
SKIP ADVERTISEMENTIn explaining why he’s still confident that the U.S. is on a disinflationary path, Powell highlights that the pandemic-era shocks are still unwinding. Even large increases in home and auto insurance, for example, should recede. “It’s real inflation, but it doesn’t portend persistently high inflation,” he said.
Powell highlights recent progress on housing inflation. That has been a particularly stubborn category, and one where forecasters had long anticipated price growth to cool. There have been recent signs that is finally happening, which is clearly coming as a relief to policymakers.
The U.S. dollar is roughly 0.8 percent higher for the day, a big move, and it’s the largest daily jump since the presidential election last month. Typically, lower interest rates weaken the dollar, but forecasts for higher growth next year appear to be supporting the U.S. currency, especially amid economic trouble brewing abroad.
“The U.S. economy is just performing very, very well, substantially better than our global peer group,” Powell says. There is no sign of a recession is becoming more likely.
Advertisement
SKIP ADVERTISEMENTSeveral reporters have tried to dig into the same basic question here: If the Fed thinks inflation is going to remain stubborn next year, why is it still cutting rates? Powell’s response is, in effect, that future rate cuts aren’t guaranteed.
For those who might not follow Fed policy that closely, when Powell talks about how inflation has come down, that doesn’t mean that prices have broadly declined, or that they will going forward. Making fewer rate cuts is an effort to keep prices from rising more quickly, because if borrowing costs are higher, that would tend to slow down consumer spending and business expansion.
Asked about tariffs, Powell stresses that it isn’t clear what the incoming Trump administration will actually do — such as what tariffs it will impose, on what products and from what countries. As a result, he says, it is too soon to adjust their forecasts, let alone their policies.
Stocks have continued to slide while Powell has been responding to questions. The Russell 2000 index of smaller companies more tied to the economy is over 1 percent lower for the day. The S&P 500 is down almost 1 percent.
Advertisement
SKIP ADVERTISEMENTAdvertisement
SKIP ADVERTISEMENTAdvertisement
SKIP ADVERTISEMENTAdvertisement
SKIP ADVERTISEMENTAdvertisement
SKIP ADVERTISEMENTAdvertisement
SKIP ADVERTISEMENTAdvertisement
SKIP ADVERTISEMENT
Posts
No comments:
Post a Comment