Federal Reserve Cuts US Dollar Interest Rates
On 18th September 2024 the Federal Reserve cut interest rates by 50 basis points: an aggressive start to bring interest rates down in the United States. After more than twelve months, the FOMC voted by 11 to 1 to lower the federal funds rate to a range of 4.75% – 5%, reflecting the first interest rate cut in over four years. Whilst the markets are expecting further rate cuts this year, projections released by the Federal Reserve regarding the same showed that there was a narrow majority of 10 to 9 in favour of further cuts in 2024.
Following the announcement, the Federal Reserve Chairman Jerome Powell was quoted in a press conference as saying, “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%”. Whilst inflation is indeed moving downwards, analysts suggested that the Chairmans press conference was economic speak for “we are still not sure about the labour market”.
However, Chairman Powell did caution the markets not to take this rate cut as a confirmation that the Federal Reserve has now set the pace at which rate cuts will be considered in the future. As usual, any further rate was tempered with a statement from policymakers that “they will consider additional adjustments to rates based on incoming data, the evolving outlook and balance of risks”. Further tempering was added when policymakers also advised that jog gains have slowed, and inflation remains slightly elevated.
Despite these somewhat negative announcements regarding future interest rate cuts, the financial markets have taken the opposite view with traders ramping up their bets on future interest rate cuts and pricing in a further 70 basis points of rate cuts between now and the end of Q4. Experts suggest that the pace of rate cuts will be as the market predicts, as previously traders have done a relatively good job of predicting the amount and early pace of the cuts. Indeed, despite negative rhetoric, including the warning that ‘the outlook for the world’s largest economy was uncertain’, the ‘Dot Plot’* published by the Federal Reserve indicates that interest rate could be cut by another 50 basis points by the end of Q4, and a further full 1% cut in 2025.
*Dot Plot – This is a graphical display consisting of data points which the Federal Reserve uses to predict interest rates. The graphs display quantitative variables where each dot represents a value.
