The US Federal Reserve announced its eighth and final monetary policy decision for 2024 after a two-day Federal Open Market Committee (FOMC) meeting and slashed its benchmark interest rate by (25 bps) or a quarter of a percentage point to 4.25-4.50 per cent. US Fed chair Jerome Powell-led rate-setting panel cut the federal funds rate for the third straight meeting after kicking off its policy easing cycle in September for the first time in four years.
US Fed now projects just two quarter-percentage-point rate reductions by the end of 2025, down from their September estimate of four rate cuts. “In considering the extent and timing of additional adjustments to the target range, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” said the FOMC in its policy statement.
Follow Live Updates: US Fed Meeting LIVE: Wall Street crashes after FOMC rate cut outlook, Dow logs longest losing streak since 1974
This is the final planned interest rate decision before outgoing Democratic President Joe Biden makes way for Republican Donald Trump in the White House as the new US President, whose economic proposals include tariff hikes and the mass deportation of millions of undocumented workers.
While US inflation has "eased significantly," the level remains "somewhat elevated" compared to the US Fed's long-term target of two per cent, said US Fed Chair Jerome Powell in the post-policy press conference. He added that the Fed was now "significantly closer" to the end of its current easing cycle.
US Fed Policymakers voted 11-to-1 to lower the central bank's key lending rate to between 4.25 and 4.50 per cent. Cleveland Fed President Beth Hammack, who joined the central bank earlier this year, dissented, indicating she would have preferred to leave rates unchanged at this week's meeting.
“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” said US Fed chair Powell. “We can, therefore, be more cautious as we consider further adjustments to our policy rate," added Powell.
Powell added that rates were still ‘meaningfully’ restraining economic activity and that the Fed is ‘on track to cut.’ However, he said, officials would have to see more progress on inflation before making additional cuts. The US central bank maintained the key borrowing rate at the 23-year high for 14 consecutive months since July 2023 to combat the worst inflation outbreak in almost 40 years.
The US Fed reined in the number of cuts expected in 2025, signalling greater caution over how quickly it can continue reducing borrowing costs due to elevated inflation. New quarterly forecasts showed several US Fed officials pencilled in fewer rate cuts for next year than they estimated just a few months ago.
According to the median estimate, US Fed policymakers now see the benchmark rate reaching an average of 3.75 per cent to four per cent by the end of 2025, implying only two quarter-percentage-point cuts, half of what they projected in September. Only five officials indicated a preference for more reductions next year.
US Fed policymakers hiked their outlook for headline US inflation next year to 2.5 per cent, and do not see it returning to two per cent before 2027. In a positive news for the world's largest economy, FOMC members raised their outlook for growth this year to 2.5 per cent, and to 2.1 per cent in 2025.
Powell noted that the Fed's latest projections “have core inflation coming down to 2.5 per cent next year. That would be significant progress,” he said. “We’d see meaningful progress to get inflation down to that level. We and most other forecasters still feel we are on track to reach two per cent. It might take a year or two from here.”
Policymakers expect the unemployment rate to be slightly lower this year than previously predicted at 4.2 per cent before ticking up slightly to 4.3 per cent in 2025 and 2026 -- a figure at least one analyst said was overly optimistic. The unemployment rate has risen nearly a full percentage point in the past two years. Concern over rising unemployment contributed to the Fed’s decision in September to cut its key rate by 50 bps.
The US Federal Reserve, in addition to its main interest-rate cut, lowered the rate on a facility used to help control its benchmark as it aims to keep US funding markets running smoothly. It lowered the rate on the overnight reverse repurchase agreement facility relative to the lower bound of the target range by five basis points.
Taken together with the Fed’s reduction in the overall target range for the fed funds rate to 4.25 per cent to 4.50 per cent, the new RRP rate is 4.25 per cent — in line with the lower bound for the first time since 2021. The facility is designed to help put a floor under the Fed’s target for the federal funds rate by soaking up cash from outside the banking system.
The move may aim to preempt tightness in money market rates. It may also allow the Fed to shrink its balance sheet further by driving more money into bank reserves. The US Fed also announced it would reduce the rate it pays lenders using its overnight reverse repurchase facility by 30 basis points.
In its policy statement, the US Fed said, ‘’The Committee will continue reducing its holdings of Treasury securities, agency debt and agency mortgage‑backed securities.'' The Fed had announced it would scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing $25 billion in Treasury bonds to run off each month compared to $60 billion.
5.Wall Street crashes on rate cut outlook; S&P 500 logs worst Fed day since 2001, Dow logs longest losing streak since 1974
The US Federal Reserve jarred US stock markets on Wednesday, pushing most stocks lower and sending US Treasury yields soaring after forecasting fewer interest rate cuts next year. According to Bloomberg, it was the worst loss for the S&P 500 on the day of a rate decision since 2001.
The S&P 500 fell below the 6,000 level, suffering its worst session since August. The tech-heavy Nasdaq 100 dropped 3.6 per cent, the most in five months. For the Dow, it was its tenth consecutive daily loss, marking its longest losing streak since 1974 and its biggest daily percentage decline since early August.
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