Federal Reserve expected to slash interest rates by another 50 basis points by year-end

The Federal Reserve projects interest rates cut by another half point before the end of 2024, offering two policy meetings to make the move. The spotlight now shifts towards the future course of action by the US Fed after the most recent 50 basis point reduction in the September 18 Federal Open Market Committee meeting according to a report by CNBC.

“There’s nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to get this done,” Fed Chairman Jerome Powell said in a news conference. “This process evolves over time.”

What will be the trajectory of the federal funds rate going ahead?

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The 'dot plot' put out by the Fed showed that 19 of the FOMC's members, both voting and non-voting members, anticipate that the benchmark federal funds rate will top 4.9 per cent by year-end. The target band goes as high as 4.25 per cent to 4.5 per cent. The remaining meetings for this year are November 6-7 and December 17-18.

Looking ahead to 2025, it predicts interest rates will settle at 3.4 per cent, meaning yet another full-point cut. Then, by 2026, the rate is expected to decline even further to 2.9 per cent, which would be another half-point cut.

Brief history of the Federal Reserve and its role

The Federal Reserve System or the Fed is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system to alleviate financial crises. The goal of the Federal Reserve is to balance inflation and growth in the US.

Further, over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

What did the Fed do on Wednesday?

On Wednesday, it lowered its first rate cut since the onset of the Covid19 pandemic as it trimmed the federal funds rate by 50 basis points, to a range of 4.75 percent to 5 percent.

Moreover, Fed officials adjusted their forecast of this year's unemployment rate to 4.4 per cent, against an earlier estimate of 4 per cent in June. This reflects continued economic hurdles and evidence of a conservative mindset regarding the dynamics of recovery after the pandemic.

The cut in interest rates is likely to make a huge difference both for consumers and businesses alike. Lower borrowing costs could have an immediate positive effect on spending and investment, thus boosting growth into 2025. Policymakers are also concerned about increased inflation and unemployment levels as they move forward with these steps.

The Fed's experience with this new trend of change in strategy i.e., reduction of rates, after four years, will continue to shape according to the changing economic conditions. Therefore, the focus of market participants shifts towards the upcoming policy meetings of the Federal Reserve.