U.S. Federal Reserve -Brief
The U.S. Federal Reserve is expected to lower interest rates by 25 basis points at its next two meetings, a move predicted by most economists. Following a recent easing cycle that began with a half-point rate reduction, the Federal Reserve is now preparing to adjust the federal funds rate by smaller increments, with a November cut to 4.50% expected. This decision aims to support a steady economy without overstimulating growth, particularly as inflation begins to stabilize.
Why the Federal Reserve Is Likely Cutting Rates
The Fed’s recent moves reflect a balance between supporting economic stability and managing inflation. Recent economic data, including strong consumer spending and a stable job market, show an overall robust U.S. economy. With inflation trends under control, the Fed is adjusting rates to sustain this momentum. Although the job market remains strong, a gradual approach to rate reductions is seen as the best way to address economic challenges without spiking inflation.
Two Rate Cuts Expected by End of 2024
Most analysts expect the Fed to reduce rates by 25 basis points in November, followed by another 25-point cut in December. If these cuts happen, they will lower the benchmark rate to a range between 4.25% and 4.50% by year’s end. According to a Reuters poll of 111 economists, these smaller cuts align with the Federal Reserve’s current approach of taking measured steps to avoid overstimulation of the economy.
More Rate Adjustments Possible in 2025
Looking ahead, the Fed might implement further rate cuts in the first half of 2025. This ongoing approach to rate cuts is designed to provide economic support, with experts predicting the target rate to settle at approximately 3.00%-3.25% by the end of next year. As of now, nearly 80% of economists surveyed foresee the rate staying in this restrictive territory, which will be slightly higher than the 2.9% “neutral rate” that the Federal Reserve has defined.
What These Rate Cuts Mean for the Economy
The anticipated rate cuts are intended to stimulate growth while keeping inflation in check. By gradually adjusting rates, the Federal Reserve hopes to achieve its long-term target of 2% inflation. Recent data from the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, shows inflation close to this target. Current forecasts suggest PCE inflation may dip slightly, helping the Federal Reserve maintain a stable economic environment as growth continues.
Potential Risks of Rate Cuts Amidst Political and Economic Changes
As the U.S. heads toward the 2024 presidential election, the Fed rate policies may play a significant role. Economic policies proposed by both parties could influence inflation. For example, if Donald Trump’s proposed tax cuts and import tariffs go into effect, economists predict higher inflation risks, which could put pressure on the Federal Reserve to adjust its approach. The central bank’s strategy reflects a need to stay responsive to both domestic growth and global economic conditions, which can impact inflation trends and economic stability.
Growth Outlook: Rate Cuts and Economic Expansion
Experts predict that the U.S. economy will continue to grow faster than the Federal Reserve’s defined “non-inflationary growth rate” of 1.8%. Gross domestic product (GDP) forecasts show a growth rate of approximately 3% in the last quarter, with more expansion anticipated in 2025. This growth is seen as an opportunity for the Federal Reserve to promote economic stability while carefully monitoring inflationary pressures.
In summary, the Federal Reserve’s expected rate cuts reflect a cautious approach to balancing economic growth and inflation. With two more rate reductions likely by the end of 2024, the central bank’s decisions will shape the economic outlook into 2025. As inflation trends stabilize, the Federal Reserve’s gradual cuts aim to support a stable and growing economy, creating a balanced foundation for the coming years.
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