Fed cuts US rates for third successive time

But with inflation and the jobs market resilient, Fed points to 50 bps of cuts for 2025, compared to 100 bps flagged in Q3.

18 December 2024

So they went ahead anyway. The US Federal Reserve (Fed) cut interest rates by 25 basis points (bps) to a 4.25%-4.5% target range. Commentators could be forgiven for wondering why this was necessary at all. US headline CPI inflation stands at 2.7%, fully 0.7% above the 2% target rate. Ah, the Fed apologists might well add, you forget the dual mandate of unemployment. But here too, the rationale is weak. Yes, the unemployment rate is a touch higher now at 4.2% than it was at the start of the year (3.7%), but this surely reflects in part the transition period that occurs between rising participation in the workforce since 2023, and deployment into actual jobs. And the latest non-farm payrolls revealed a cool 227,000 workers added across America in November. Either way there is nothing to see here - neither low inflation, nor a pressing labour market issue. So why is the Fed still cutting rates so deterministically?

It’s worth bearing in mind that the Fed is not a nimble institution and may not even be fit for its intended purpose anymore. It could be argued that since the Great Moderation of inflation from the early 1980s to 2021, the role of the Fed was relatively simple; gradually cut rates and keep them down. But today, the US economy fits less easily into such neat narrative structures that institutions like the Fed can adapt to. Control over inflation is now proving frustratingly elusive (spare some thought too for the Bank of England with the UK’s recent 2.6% inflation print) while the US economy is doing well, and is expected to do even better in 2025. Wrong-footedness has characterised the Fed’s response to price rises since 2022. Initially dismissing inflation as “transitory”, it then belatedly raised interest rates. Seeing inflation come down at last but mistakenly attributing that fact to those higher rates (it would probably have come down anyway), it then moved to an unwavering course of monetary policy loosening in September this year which started to look disconnected when headline CPI stopped falling and actually started rising again in the very same month.

Now, credibility really is at stake. The expectation is that the Fed should ‘preside’ over the inflation discourse, but it increasingly looks like inflation has been one step ahead ever since the pandemic ended. The forecasts accompanying this latest rate cut are now starting to hint at yet another policy shift, with just 50 bps of cuts seen next year. Perhaps more surprisingly still, new committee member Beth Hammack outright dissented from today’s rate reduction. All of this would be somewhat unsettling if it wasn’t for arguably bigger forces than the Fed, such as that strong labour market and AI, still supporting the US economy and stock market.