The Federal Open Market Committee cut its overnight borrowing rate another 0.25%, marking the third and final interest rate cut of the year.
With a target rate range of 4.25%- 4.5%, interest rates are back at the same level they were in December 2022. However, they remain far higher than the levels seen in early 2022, when rates were near zero before the Fed’s aggressive tightening campaign kicked off.
The chain of rate hikes that began in 2022 was a response to surging inflation. At its highest, inflation even crossed over 9% during the summer of that year.
Higher rates at the federal level are meant to slow economic activity sufficiently without harming the economy. Policy decisions reflect a delicate balance between suppressing out-of-control inflation and potentially suffocating economic activity.
Officially, the Fed targets an annual inflation rate of 2%, a level they consider optimal for a healthy economy. In October, the core Personal Consumption Expenditures (PCE) price index, the Fed’s favored inflation gauge, ticked up to 2.8% year-over-year, 40% higher than the Fed’s stated target.
The latest central bank cut comes amid expectations from the Atlanta Fed that the economy will grow at a reasonable rate of 3.2% during the fourth quarter of 2024. At the same time, the labor market remains resilient, with unemployment hovering around 4%. According to the so-called “dot plot,” the Fed is only expected to cut rates twice more in 2025, likely reflecting stubborn inflation and relatively robust economic data.
“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,” Fed Chair Jerome Powell said at his post-meeting news conference, per CNBC.
“We can therefore be more cautious as we consider further adjustments to our policy rate… We moved pretty quickly to get to here, and I think going forward obviously we’re moving slower,” said Powell.