At its meeting on September 18, 2024, the Federal Reserve decided to cut the benchmark interest rate by 50 basis points, setting a new target for the federal funds rate between 4.75%-5%. This is the first interest rate reduction since the start of the pandemic in March 2020. The decision was anticipated due to slowing inflation and economic growth, but the size of the cut surprised many, who had expected a more conservative 25 basis point reduction.

Economic Projections for 2024 and Medium-Term Outlook

According to the Federal Reserve’s new economic projections, the outlook for economic growth and inflation has been slightly revised compared to the estimates from June 2024:

• GDP: Real GDP growth for 2024 has been adjusted to 2%, down from 2.1% in the previous projections. However, for 2025, economic growth estimates remain steady at 2%, reflecting expectations for economic stabilization after the 2024 slowdown.
• PCE Inflation: The PCE (Personal Consumption Expenditures) inflation for 2024 has been revised down to 2.3%, lower than the previous estimate of 2.6%. This reflects optimism from the Fed that inflation control measures have been successful, while for 2025, PCE inflation is projected at 2.1%, stabilizing near the 2% target.
• Core PCE Inflation: Core inflation, which excludes volatile elements such as energy and food, is now projected at 2.6% for 2024, down from 2.8% in June projections, and at 2.2% for 2025, indicating clear progress in price stabilization.

Unemployment Rate and Labor Market Impact

A key factor in the decision to lower interest rates was the slight slowdown in the labor market. The unemployment rate for 2024 has been revised upward, from 4% to 4.4%, and for 2025 it was also revised to 4.4% (from 4.2%). This suggests that the Federal Reserve anticipates a softening labor market, but one that remains manageable, with the decrease in labor demand not expected to cause major shocks.

Future Monetary Policy

The Fed anticipates further rate cuts by the end of the year, with an additional 50 basis points, which would bring the federal funds rate to 4.25%. In 2025, the Federal Reserve predicts another 1 percentage point reduction, and for 2026, a final cut of 50 basis points is expected. This reflects a commitment to continue monetary policy easing but at a more moderate pace.

Conclusions

The Federal Reserve’s decision to aggressively cut interest rates reflects growing concerns about economic slowdown and labor market weakening. However, monetary policy remains flexible, and Powell emphasized that there is no “pre-set course,” with future decisions depending on economic data. The revised economic projections suggest moderate but manageable slowdowns, while inflation continues to decline, nearing the Fed’s long-term goal of 2%.

These developments will have a significant impact on the U.S. economy and financial markets, and the coming months will be crucial in determining the direction of monetary policy and the economy’s evolution.