Will the Fed cut interest rates again next week?

The US Federal Reserve has a dual mandate. It aims to keep the consumer price inflation (CPI) rate at 2% per year, and also tries to maintain full employment in the economy (although it does not have a specific target for the unemployment rate).

When the Consumer Price Index deviates too far from 2% or there are sharp changes in the labor market, the Fed will raise or lower the federal funds rate (also called the overnight interest rate) to affect economic activity.

At the September meeting of the Federal Open Market Committee (FOMC), the Federal Reserve decided to cut the federal funds rate by half a percentage point. The November FOMC meeting is scheduled for next Wednesday and Thursday, so is another rate cut expected?

Here’s why the Fed cut rates in September

In 2022, the consumer price index rose to a 40-year high of 8%. This was influenced by several factors:

• In 2020 and 2021, the US government injected trillions of dollars into the economy to offset the negative effects of the COVID-19 pandemic.
• For the same reason, in March 2020, the Fed cut interest rates to a historic low of almost 0%. Additionally, he injected trillions of dollars into the financial system through quantitative easing (QE).
• Covid-19 has caused factory closures around the world, leading to shortages of consumer goods and soaring prices.

This inflationary cocktail prompted a decisive response from the Fed. He raised the federal funds rate to a two-decade high of 5.33% in 18 months, with the last increase coming in August 2023.

Fortunately, this policy adjustment worked. In 2023, the consumer price index was 4.1%, and then, according to the latest data from September 2024, it fell to 2.4% year on year. That’s why the Fed decided it would be appropriate to cut rates by 50 basis points (one basis point equals 0.01 percentage point) at its last meeting.

Will there be another cut in November?

It’s highly likely there will be another rate cut next week as inflation appears to be heading toward the Fed’s 2% target. In addition, the unemployment rate has risen this year from 3.7% to 4.1%, indicating possible weakness in the labor market.

Fed Chairman Jerome Powell recently said downside risks to employment have increased, so further rate cuts are likely to be appropriate to support economic growth before further deterioration occurs.

The federal funds rate could fall another 50 basis points before the end of 2024, according to a forecast provided by the FOMC in September. With only the November and December meetings remaining, the most likely outcome is two 25 basis point cuts.

That’s exactly what CME GroupThe FedWatch tool predicts. It suggests there is a 95% chance of a 25 basis point rate cut at next week’s meeting, followed by a 78% chance of another cut of the same size in December.

Lower rates are generally good for stocks over the long term.

The FOMC’s forecast suggests there could be another 125 basis point cut in 2025, followed by one final 25 basis point cut in 2026. That could push the federal funds rate to 2.88%, nearly half its recent peak. .

Lower interest rates tend to be good for the stock market over the long term. Businesses can borrow more money to fuel their growth, and their interest costs are lower, which is a direct tailwind for their earnings. Lower rates will also put more money in consumers’ pockets to spend throughout the economy.

There is one caveat, however. Investors don’t want interest rates to fall due to an economic emergency (such as a pandemic or financial crisis) because it will put a damper on corporate earnings, leading to lower stock prices. It’s not a concern right now, but keeping an eye on the unemployment rate is a good idea: if it continues to rise, it could be a sign of trouble on the horizon.