On September 18, 2024, the Federal Reserve made its first 50 basis point (bps) rate cut since 2020, signaling a shift in monetary policy. While the economy is described as “strong overall,” the Fed has justified the cut as a proactive measure to sustain growth and control inflation.
Key Points from the Fed’s Decision
- 50 bps Rate Cut: The first rate cut of this size since 2020, marking the start of a “Fed pivot” from tightening to easing.
- Further Rate Cuts Expected: The Fed forecasts two more 25 bps cuts in 2024, anticipating the need for additional monetary support.
- Dissent Among Governors: One governor favored a smaller 25 bps cut, reflecting internal debate on the pace of easing.
- Inflation Confidence: The Fed is confident inflation is moving toward 2%, signaling reduced concerns about inflationary pressures.
- Long-Term Outlook: The Fed projects 100 bps of cuts in 2025 and 50 bps in 2026, suggesting a prolonged easing period.
Powell’s Statement on the Economy
Fed Chair Jerome Powell highlighted key aspects of the economy while explaining the rationale for the cut:
- Economy is Strong: Despite the strength, the rate cut is seen as a preemptive measure to protect against future risks.
- Labor Market Resilience: The Fed is confident in maintaining labor market strength, with consumer spendingremaining robust.
- Inflation Above Target: Inflation has eased but remains above 2%, justifying the cut to prevent tightening financial conditions too much.
- Neutral Stance: The Fed is shifting to a neutral policy, ready to adjust based on incoming data.
Why Cut Rates if the Economy is Strong?
Despite a strong economy, the Fed may be acting preemptively to support long-term growth, lower borrowing costs, and buffer against global risks. The cut also allows the Fed to stimulate the economy without reigniting inflation.
Conclusion
The Fed’s 50 bps rate cut signals a shift in focus from fighting inflation to supporting growth. With further cuts expected, the Fed is taking a flexible, data-driven approach to monetary policy, ensuring the economy remains resilient amid evolving conditions.
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