The Federal Reserve has made headlines again after lowering interest rates for the third time this year, marking another significant move amid shifting economic conditions. On December 18, 2024, the Fed announced it had reduced the interest rate by 0.25%, bringing the current range down to 4.25% to 4.5%. This strategic decision, made during the final meeting of the year by the Federal Open Market Committee (FOMC), highlights the Fed's efforts to address persistent inflation and maintain economic stability.
Chairman Jerome Powell, addressing the press after the announcement, noted, "Nuestra política ahora es significativamente menos restrictiva. Por lo tanto, podemos ser más cautelosos al considerar nuevos ajustes" ("Our policy is now significantly less restrictive. Therefore, we can be more cautious when considering new adjustments"). This reflects the Fed's acknowledgment of the current economic climate, which has shown signs of slowing inflation yet also presents challenges related to employment and consumer spending.
Despite the recent cuts, the Fed is signaling a more measured approach going forward. The latest forecast suggests only two more quarter-point reductions are expected by the end of 2025. This anticipation is rooted in various economic indicators, particularly inflation, which the Fed aims to keep nearer to its target of 2%. Presently, inflation stands at approximately 2.3% as of October, slightly above the Fed's goal.
Interestingly, the latest adjustment also reflects the Fed's reassessment of economic conditions following protracted periods of higher interest rates, which were previously put in place to combat record-high inflation seen last year. The gradual reduction from the peak rate of 5.25%-5.5% observed earlier this year suggests the Fed is carefully calibrizing its strategy to avoid stifling growth.
The potential economic ramifications of these actions cannot be underestimated. With borrowing costs closely tied to interest rates, average Americans, especially mortgage holders, might experience some relief. Nonetheless, Powell and other policymakers have cautioned against expecting significant decreases akin to pre-pandemic interest rates of around 3% anytime soon.
Reflecting on the state of the economy, Powell remarked, "Hemos evitado una recesión. Creo que el crecimiento este año ha sido sólido" ("We have avoided a recession. I think growth this year has been solid"). His words come amid reports showcasing consumer resilience and job growth. Employment figures released earlier revealed the U.S. economy added over 227,000 jobs in November, exceeding expectations and marking those drawn compared to the 36,000 added the previous month, which was disrupted by hurricanes.
Such data provides compelling evidence of the economy's current strength, yet Powell has indicated the need for persistent vigilance as inflation continues to hover above desired targets.
And if uncertainty lingers around inflation, the political climate could also impact future Fed decisions. With the advent of President-elect Donald Trump taking office soon, experts cite the unpredictability of his proposed tax cuts and tariffs on imports as potentially inflationary pressures. Powell, aware of the ramifications of such policies, expressed reluctance to speculate on their impact until legislation becomes clearer. He stated, "No sabemos qué se gravará con aranceles, de qué países, durante cuánto tiempo, en qué cantidad" ("We do not know what will be taxed, from which countries, for how long, or how much"), underscoring the uncertainty surrounding economic policy changes.
The global economic environment also warrants scrutiny as central banks worldwide, including the European Central Bank, are implementing similar rate cuts. With inflation rates currently applying pressure across the globe, the interplay between the Eurozone and U.S. economic decisions may also affect currency valuations and trade dynamics.
Analysts predict the Fed’s carefully measured strategy aims to navigate the economy through what has been termed as achieving a “soft landing.” This compromise seeks to keep inflation contained without inducing recessionary conditions.
Subadra Rajappa, Chief U.S. Rates Strategist at Societe Generale, highlighted the increased volatility and unpredictability anticipated over the next year. "Esto va a ser un trabajo en progreso a medida que las cosas evolucionen" ("This is going to be a work-in-progress as things evolve"), she noted, providing insight on the nuanced approach the Fed may need going forward to combat inflationary pressures without hindering economic growth.
Overall, as the Fed looks to the future, the emphasis remains on balancing growth and inflation, placing them on opposite sides of the scale. With its recently indicated cautious approach and forecasts signaling only gradual cuts, the financial markets are bracing for what lies ahead amid these dual challenges of inflation management and economic stimulation.
