The Federal Reserve Cut Interest Rates for Third Time This Year
The Federal Reserve announced its third consecutive interest rate cut on Wednesday, lowering the benchmark rate by 25 basis points to a range of 4.25% to 4.5%. The move comes as economic data shows that inflation remains above the central bank’s 2% target rate.
The Federal Open Market Committee (FOMC) cited labor market conditions as having “generally eased” and the unemployment rate remaining low, but noted that inflation has made progress towards the 2% objective, but “remains somewhat elevated.” The committee’s statement also noted that the risks to achieving its employment and inflation goals are roughly in balance.
One member of the FOMC, Cleveland Fed President Beth Hammack, dissented from the decision to cut rates and preferred to hold the benchmark rate at a range of 4.5% to 4.75%.
In a press conference, Fed Chair Jerome Powell said that the decision to cut rates was “the right call” to foster achievement of both maximum employment and price stability, adding that the committee sees the risks as two-sided, with the potential for the economy to grow too slowly or too quickly.
Powell stated that downside risks to the labor market have diminished, but noted that the labor market is still looser than it was before the pandemic and is continuing to cool, which is not necessary to achieve the 2% inflation target. He also highlighted that the pace of decline in inflation has flattened over the last year due to slower-than-expected falls in housing services inflation and some “bumpiness” in prices for goods.
The FOMC also released a summary of economic projections, which shows two rate cuts in 2025, two cuts in 2026, and one cut in 2027. The median forecast for the federal funds rate is 4.4% at the end of 2024, declining to 3.9% in 2025, 3.4% in 2026, and 3.1% in 2027. The projection also shows the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, will finish this year at 2.4% and will be 2.5% in 2025, declining to 2.1% in 2026 before reaching 2% in 2027 and over the longer run.