On November 10, 2024, the US Federal Reserve announced a quarter-point interest rate cut, reducing the target range to 4.50% to 4.75%. This decision, made unanimously by the Federal Open Market Committee (FOMC), aims to ease economic strain following Donald Trump’s recent election victory [4247121d]. Fed Chair Jerome Powell emphasized the bank’s independence and commitment to data-driven decisions, reassuring that leadership changes at the Fed are not permitted under law [4247121d]. This marks the Fed’s return to rate cuts after a prolonged period since 2020, reflecting its response to evolving economic conditions [b168aa60]. The decision was anticipated by Wall Street, which assigned a 67% probability to the rate cut prior to the announcement [b168aa60]. Following the Fed’s meeting, futures traders indicated a 78% chance of maintaining the current rates through January 2025, while Goldman Sachs has revised its outlook, delaying further cuts to June and September 2025 [b168aa60].
The rate cut follows a half-point reduction in September and comes amid a robust employment situation, as highlighted in the latest Beige Book. The unemployment rate has decreased from 4.3% in July 2024 to 4% in October, with jobless claims dropping by 12,000 last week [3acec55][b168aa60]. Wage growth remains elevated at around 4%, although the Fed aims for a more sustainable range of 3% to 3.5% [3acec55]. However, as of November 11, 2024, the unemployment rate has slightly increased to 4.1%, and job openings have decreased to 7.4 million from 9.3 million year-over-year, indicating potential challenges in the job market [d0f0d97e].
On November 14, 2024, Powell stated that the strong economy, characterized by a 4.1% unemployment rate and 2.5% annual growth, does not necessitate immediate interest rate cuts. He emphasized that inflation remains above the 2% target, with the core personal consumption expenditures (PCE) index rising at a 2.8% rate in October [3538cf5e]. Powell lauded the US economy as "remarkably good," noting it is performing better than any major economy globally, and highlighted that inflation is trending down towards the Fed's 2% target [365869a3]. He indicated that the Fed will likely cut interest rates slowly due to persistent inflation pressures, especially as inflation in the U.S. increased in October, driven by higher rents, used cars, and airfares [5a016981]. The Fed's policy-setting committee is scheduled to meet in mid-December, where a quarter-point rate cut is anticipated but not guaranteed [c64de9a6]. Powell reiterated the importance of assessing incoming data and the evolving economic outlook before making decisions [c64de9a6].
However, strong US economic data, including robust retail sales and rising import prices, have led investors to downgrade expectations for a December rate reduction. Traders have reduced bets on a December cut to 60% from 70%, reflecting concerns about the economy's strength [da32e37e][f298c7ad]. Boston Fed President Susan Collins stated that while December is still a possibility for a rate cut, the current economic indicators suggest a more cautious approach [da32e37e][f298c7ad]. Chicago Fed President Austan Goolsbee also noted that inflation remains high at 2.8% for October, further complicating the Fed's decision-making process [da32e37e][f298c7ad]. Fed Governor Michelle Bowman has cautioned against rapid rate cuts, warning that such actions could reignite inflation, especially as recent inflation figures show stubbornness in some sectors [0a853ea5].
In a previous statement on July 31, 2024, Powell indicated that the Fed will likely implement cautious rate cuts due to persistent inflation pressures. While inflation is approaching the Fed's 2% target, it has not yet reached it [a91fca81]. Economists predict a quarter-point rate cut in December 2024, following a similar cut last week and a half-point reduction in September 2024 [a91fca81]. Wall Street traders have reduced expectations for future cuts from four to two in 2025, despite earlier signals from the Fed suggesting four cuts [5a016981][a91fca81]. Powell acknowledged that inflation may remain slightly above the target in the near term but is expected to decline over time [a91fca81].
The Fed's outlook remains positive with expectations of further rate cuts in December 2024, as inflation is nearing the Fed's 2% target after significant hikes in 2022 and 2023 [f249fafd]. However, inflation has recently ticked up from 2.4% to 2.6% in October 2024, raising concerns among Fed officials about the timing and necessity of further rate cuts [89980a14]. Neel Kashkari expressed surprise at the economy's resilience but noted softness in the labor market, while Tiffany Wilding cautioned against immediate cuts [89980a14]. Joe Brusuelas anticipates a 25-basis-point cut, adjusting the federal funds rate to between 4.25% and 4.5% [89980a14]. Former Cleveland Fed President Loretta Mester warned against aggressive cuts due to potential impacts from tariffs [89980a14].
The Fed's decision is particularly significant in light of the closely contested presidential election between Democratic Vice President Kamala Harris and Republican former president Donald Trump, who claimed victory in the election, raising speculation about future Fed policies [e96f6dc5][b168aa60]. Polls showed them in a dead heat ahead of Election Day on November 5, 2024 [e96f6dc5]. Analysts suggest that the interaction between fiscal stimulus and the Fed's approach will be crucial for maintaining economic stability, especially as both candidates' policies may increase the deficit, potentially leading to higher long-term rates [0a531328][221d132a][74cbf571].
In the wake of the Fed's decision, the S&P 500 rose by 0.74% to an all-time high, while the Nasdaq jumped 1.5%, and the MSCI World Index climbed 0.9% [edbd4bd7]. Additionally, US Treasury yields fell, with the 10-year yield dropping to 4.3355% [edbd4bd7]. However, following Powell's remarks on November 14, market expectations shifted significantly, with the probability of a rate cut dropping from 85% to 62% [16bf8544]. The ten-year Treasury yield surpassed 4.5%, contributing to declines in stock prices by over 2% [16bf8544]. Retail sales rose by 0.4% in October, but core inflation at 2.6% year-over-year raised concerns about consumer spending and economic sustainability [16bf8544].
Concerns have been raised about the rising US government debt, which is nearing $36 trillion, with interest payments exceeding $1 trillion annually. Analysts warn that Trump’s fiscal policies could push the debt to 116% of GDP by 2028, potentially creating challenges for central banks [700dce95]. The labor market remains a concern, with only 12,000 nonfarm payroll jobs added in October [c0ae399c][29ad1979]. The US budget deficit has also reached $1.8 trillion for fiscal year 2024, complicating the economic landscape further [85f5807a]. The average 30-year fixed mortgage rate has risen to 6.79%, up from 6.1%, causing confusion among homebuyers [d0f0d97e][e96f6dc5]. Furthermore, Cox Automotive reported a 30 basis point drop in auto financing rates, but 73% of car buyers have delayed purchases due to high prices and interest rates [b168aa60].
As the Fed approaches its next meeting on December 16-17, 2024, Powell has indicated that there are no immediate plans for aggressive rate cuts despite previous reductions of 50 and 25 basis points. He emphasized a cautious approach due to ongoing economic uncertainty, particularly as October's Producer Price Index (PPI) rose by 0.2% and the Core PPI increased by 0.3%, indicating persistent inflation [6cc84d3a]. The upcoming November CPI data will be released on December 11, 2024, followed by PPI data on December 12, 2024 [6cc84d3a]. The Dow 30 has seen a 15% increase, while the S&P 500 and Nasdaq 100 are up over 20% in 2024, but markets remain in a wait-and-see mode until clearer economic indicators emerge [6cc84d3a].
In a related move, the UAE Central Bank has also reduced its benchmark interest rate by 25 basis points to 4.65%, effective November 8, 2024, aligning with the US Federal Reserve's recent decision [30fecb39]. This adjustment is part of a broader trend among Gulf economies, including Saudi Arabia and Qatar, which have also modified their rates [30fecb39]. The UAE's economy is projected to grow by 4% in 2024, with inflation forecasted at 2.2% [30fecb39].
The recent rate cuts by the Federal Reserve are expected to improve borrowing options for state and local governments, facilitating infrastructure projects and potentially increasing tax revenues. Economists predict another rate cut in December 2024, which could further lower borrowing costs for states that are currently facing slower revenue growth and challenges in managing infrastructure costs [f2a134a3]. Officials from various states, including Wisconsin and California, express optimism about the potential benefits of lower borrowing costs for public services and housing development, while acknowledging ongoing challenges in housing affordability [f2a134a3]. As the Fed navigates these turbulent waters, it remains focused on balancing stable prices and maximum employment while being cautious of inflationary pressures and political dynamics, particularly with Trump’s potential influence on future monetary policy [ffda757b]. Expectations for further cuts could lower rates to between 2.75% and 3% by 2026, reflecting the Fed's ongoing strategy amidst political uncertainty [ffda757b]. The upcoming December meeting will be crucial for the Fed's monetary policy as officials weigh the implications of rising inflation against economic resilience. On November 15, 2024, Powell reiterated that the US economy is performing better than any other major economy globally, a statement that underscores the Fed's confidence in the current economic trajectory [8eb4dd84]. In his latest remarks, Powell emphasized that the Fed is not in a hurry to lower interest rates, citing the need for certainty before making policy changes. He acknowledged that while significant progress has been made in controlling inflation, the path ahead may be 'bumpy' [32f76da2]. Futures traders estimate a nearly 60% chance of a further quarter-point rate cut in December, reflecting ongoing market adjustments to the Fed's monetary policy [32f76da2].