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July 2024




The Fed: The Fed Getting Ready to Cut Interest Rates



Paul Single Managing Director
  • The Federal Reserve Bank is getting ready to start cutting interest rates.
  • Inflation has returned to its downward trajectory, increasing at just a 1.1% annualized rate (in the second quarter).
  • The pace of consumer spending has moderated, and, more importantly, the pace of payroll gains has slowed.

The Federal Reserve Bank is getting ready to start cutting interest rates. We expect that the first cut will be 25 basis points at its September 18 meeting.  For well over a year, the pace of economic growth has been slowing from its breakneck pace. However, inflationary pressures have not declined enough to warrant the lowering of interest rates. Since shortly after the Fed began its tightening of monetary policy, back in March of 2022, inflationary pressures have been declining (Chart 1).

Chart 1: Consumer Price Index
% change y-o-y, seasonally adjusted

Source: Bureau of Labor Statistics, Federal Reserve Bank, as of June 2024.

Information is subject to change and is not a guarantee of future results.

 

This was the result of increasing financing costs and the resolution of most post-pandemic logistical snarls. Inflation fell quickly to 3.0% in June 2023, following its peak of 9.1% in the previous June. For the rest of 2023, the inflation rate stabilized in the 3.0% to 3.5% range, frustrating the Fed. Then, in the first quarter of this year, it started to move back up, with an annualized rate of 4.6%, further disappointing the Fed, since the federal funds rate was at the highest level in more than two decades. 


But, in the second quarter, inflation has returned to its downward trajectory, increasing at just a 1.1% annualized rate. This has given the policymakers greater confidence that inflation is heading down to the central bank’s target of a sustainable 2.0% rate. 

This is happening at a crucial time as the economy continues to move into a more mature business cycle phase. The pace of consumer spending has been moderating, and, more importantly, the pace of payroll gains has slowed. The average monthly gain for the past three months (data can be volatile on a month-to-month basis) is 177,000, down almost 100,000 from a year ago (Chart 2). Although it’s still at a solid pace, and well above the approximate pace of population growth, the Fed is growing wary about the cooling pace. 

Chart 2:  Nonfarm Payrolls
‘000, seasonally adjusted

Source: Bureau of Labor Statistics, as of June 2024.

Information is subject to change and is not a guarantee of future results.

The Fed has a dual mandate, seeking maximum employment and price stability. For the past year, its focus has been battling inflation, since it was too high, and labor demand was strong. But now, the mandate is more balanced, so the Fed needs to start lowering interest rates to ensure continued economic growth.

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