Even amid a volatile election week on Wall Street, the outcome of the Federal Reserve’s meeting this week is all but assured: Markets anticipate a quarter percentage-point cut, which would bring the Fed’s benchmark federal funds rate down to a range of between 4.5% to 4.75%.
Bill Adams, chief economist for Comerica Bank, says revisions in last week’s jobs report indicating that the labor market has grown weaker sent a signal that rate cuts are justified.
(Revisions to the government’s labor market reports are common. The Bureau of Labor Statistics uses multiple data sets to compile its picture of the nation’s employment situation. Since the two surveys that comprise each month’s report are essentially snapshots, the agency uses other data — not available until a month or two later — to improve the accuracy of its initial reports.)
“The jobs reports revisions to August and September show that the labor market was running cooler,” Adams adds. “Those will be important to the Fed.”
According to the CME FedWatch Tool, which uses movements in the futures market as a guide to Wall Street’s rate expectations, there is nearly a 100% chance of a 25-basis-point cut this week. (One percentage point is equal to 100 basis points.)
The Fed meeting starts Wednesday, and the rate cut announcement is expected Thursday afternoon.
This past September, the Fed made its first interest rate cut in years in an effort to keep the economy from falling into a recession while maintaining control of inflation, which is still higher than the Fed’s 2% long-run target. Lower rates make it cheaper to borrow money and service debt, so these moves will bring relief to people and businesses who need to take out loans or who are paying off variable-rate debt.
While borrowers might be impatient for quicker and steeper cuts, though, the expectation of a measured pace is good news: It indicates that policymakers think the economy is healthy enough to support these higher borrowing costs.
“Separate from the election, the state of the private market economy in the U.S. is behaving much more normally in the last six months than it did in the years after the pandemic, and that normalization is great news for the outlook for 2025,” Adams says.
What will happen in December?
When the Fed’s policymaking Federal Open Market Committee meets this week and issues its rate announcement, analysts will closely parse that statement as well as the recent commentary of Fed Chair Jerome Powell for clues about future activity. Even with the potential for policy changes under the Trump administration in 2025, experts say the Fed’s path for the rest of this year is likely set: According to the CME, there is a roughly 80% probability that after this week’s expected cut, rates will be lowered one more time at the Fed’s final meeting of the year in December.
“It likely won’t be big moves, but more steady and consistent throughout the rest of 2024 and into 2025,” says Heather Winston, assistant vice president and head of product strategy at Principal Asset Management.
These small steps reflect the balance policymakers have to strike between keeping the labor market healthy and maintaining its 2% inflation target.
“Inflation isn’t necessarily all bad. It’s a sign of growth,” she says.
Though nobody has a crystal ball, analysts think the Fed is likely to take its time rolling back the rate hikes it initiated in 2022 to curb runaway inflation. This is especially true because President-elect Donald Trump has signaled support for policies, such as tax cuts, that could accelerate economic activity.
This would keep borrowing costs somewhat higher, but the idea is that this would be offset by economic growth that would put more money in people’s pockets. And even incremental cuts could be helpful to people seeking to make big-ticket purchases like cars and homes.
The fed funds rate is the benchmark banks use to anchor the prime rate, which is the baseline lenders use for many consumer credit rates, like credit card annual percentage rates. The fed funds rate also influences mortgage rates, although indirectly, so Americans should prepare for fluctuations.
“I think mortgage rates will be at least somewhat lower in 2025, and I’m expecting revolving credit interest rates, like the rates on most credit cards and the rate for loans linked to the prime rate, to come down more,” Adams says.
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