The Fed lowers rates for the third time since March 2020 by cutting them by 25 basis points

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The Federal Open Market Committee (FOMC) of the United States Federal Reserve (Fed) decided this Wednesday to lower interest rates by 25 basis points, leaving them within the target range of the 4.25% to 4.50%.

This reduction follows the one decreed last September of half a point, when the price of money was cut for the first time since March 2020, and the one of a quarter of a point in November.

In its statement, the entity has stressed that the risks to optimize employment and inflation are “more or less balanced” and that it remains “attentive” to possible threats from both fronts.

“Recent indicators suggest that economic activity has continued to grow at a solid pace. Since the beginning of the year, the labor market has generally lost steam and the unemployment rate has risen, although it remains low. Inflation has continued moving toward the 2% target set by the Committee, but it remains somewhat high,” the Fed summarized.

The FOMC has indicated that when modifying the reference rate it will be attentive to the impact of incoming data on the macroeconomic environment.

In this sense, the issuing institute has assured that it will be “prepared” to adjust the rates if necessary, for which the labor market and inflation readings will be analyzed, as well as the effects derived from international and financial events.

As happened in September, when Michelle Bowman, belonging to the ‘hawkish’ wing of the Fed, voted against cutting the reference rate, on this occasion, it was Beth Hammack who was opposed to adjusting rates. According to the document released, the latter was in favor of keeping them at 4.50%-4.75%.

On the other hand, the Fed will continue with its plans to reduce the balance sheet, reinvesting the principal of the debt that matures between Treasury bonds and mortgage-backed securities.

ECONOMIC FORECASTS

Likewise, the Fed has also published the update of its macroeconomic forecasts, as well as its members’ estimates on the evolution of interest rates.

In September, FOMC members expected rates to be between 4.50% and 4.75% at the end of 2024, although some members were betting on even higher figures. The ‘dot-plot’, or dot diagram, now shows that the bulk of its members bet on 4.25% or, to a lesser extent, 4.75%.

The Fed’s central projection indicates that interest rates in 2025 will be between 3.6% and 4.1% compared to the September projection of 3.1% and 3.6%. For 2026, the forecast is for the range to be between 3.1% and 3.6%, when the previous forecast showed a range of 2.6% and 3.6%. In 2027 they will be between 2.9% and 3.6%.

Regarding macroeconomic evolution, the issuing institute has improved part of its outlook. Thus, it has revised the country’s GDP growth by half a point upwards, to 2.5%, in 2024. Subsequently, the growth forecast for 2025 has been modified by one tenth more, to 2.1%, and the from 2026 has remained at 2%. In 2027, the economy would expand by 1.9%.

Regarding unemployment, the Fed estimates that the country will have an unemployment rate of 4.2% in 2024, two tenths less than estimated three months ago. For the next three years, it will remain stable at 4.3%.

For its part, inflation will be 2.4% at the end of the year, one tenth more than in the September forecasts, while the underlying variable, which excludes energy and food prices from its calculation due to their higher volatility, will be at 2.8%, two tenths more.

In 2025, the general and underlying index will be 2.5%, four and three tenths more, respectively, while in 2026 the general will be 2.1% and the underlying will be 2.2%. In 2027, both will converge at 2%.

GDP, UNEMPLOYMENT AND INFLATION

The economy of the world’s leading power experienced annualized growth of 2.8% in GDP in the third quarter of 2024 compared to 3% in the previous three months.

Regarding the US labor market, 227,000 non-agricultural jobs were created during November, well above the 36,000 in October that were recorded due to the impact of the hurricanes in the south of the country. However, unemployment rose one tenth to 4.2%.

The personal consumption expenditure price index, the Fed’s preferred statistic to monitor inflation, stood at 2.3% in October, two tenths more. The monthly rate registered an advance of 0.2%, without changes. The underlying variable closed at 2.8% year-on-year, one tenth more.