Key takeaways
At its November 2024 meeting, the Fed cut interest rates by 0.25%, following its 0.50% cut in September.
The Fed’s actions aligned with market expectations.
Investors anticipate additional interest rate cuts are likely in the months ahead.
With the 0.25% cut in the federal funds target rate in November, the Federal Reserve’s (Fed’s) Federal Open Market Committee (FOMC) continues to recalibrate U.S. monetary policy as inflation recedes. The latest rate cut followed September’s 0.50% cut. The fed funds target rate, the rate banks charge each other for overnight lending that also tends to influence consumer interest rates, is currently set at 4.50% to 4.75%.
The Fed held rates at 5.25% to 5.50% from July 2023 to September 2024. Between March 2022 and July 2023, the Fed raised rates eleven times, from near 0%.
While FOMC members and investors anticipate continued fed fund rate cuts into 2025, Fed Chair Jerome Powell said after November’s meeting that “We are not on any preset course. We will continue to make our decisions, meeting by meeting.” He noted that the Fed would “carefully assess incoming data, the evolving outlook and the balance of risks.”1
The U.S. economy continues to demonstrate solid growth, with third quarter Gross Domestic Product (GDP) expanding at an annualized pace of 2.8%, following 3.0% second quarter growth.2 “The consumer is still hanging in there,” says Eric Freedman, chief investment officer for U.S. Bank Asst Management. “However, the environment may be getting a little tougher for lower-income consumers.”
Powell indicates that even with the economy on a favorable growth track, the Fed feels cutting rates is appropriate as it tries to achieve what is considered a “neutral” fed funds target rate. Powell indicated that elevated interest rates may be a drag on the economy.3 “A key question is the level which would be considered a neutral fed funds rate,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Markets are likely to watch that closely.” In its own projections, the FOMC has indicated the fed funds rate could level off near 3%.4
Along with interest rate cuts, the Fed continues what it began in 2022, reducing its balance sheet of fixed income assets. At its peak, the Fed’s balance sheet grew to nearly $9 trillion dollars. Each month, the Fed trims its Treasury bond holdings by $25 billion, and cuts its mortgage-backed securities positions by $35 billion. Its holdings are now approximately $7 trillion.5 “It seems unlikely the Fed will drop its balance sheet back to the $4 trillion level, as it stood in 2015-16, but given the extent the economy has grown since then, a larger Fed balance sheet may be justified,” says Haworth.
The Fed’s primary purpose in raising rates and keeping them elevated was to combat the highest inflation since the early 1980s. At its peak, inflation, as measured by the Consumer Price Index (CPI), reached 9.1% for the 12 months ending in June 2022. The most recent CPI reading, for the 12 months ending in September 2024, showed inflation at a much improved 2.4%.6 “Given the recent rate cuts, the Fed is saying that it recognizes inflation is coming down,” says Freedman.”
The Fed is increasingly focused on the U.S. labor market. Slowing payroll growth and a rising unemployment rate are concerns.7 “The Fed doesn’t want to see too much softness in the employment market,” says Haworth. That would contribute to a slowing economy. Although the nation’s unemployment rate moved above 4% in mid-2024, it has, in recent months, held steady.7
“Given the recent rate cuts, the Fed is saying that it recognizes inflation is coming down,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management.”
Haworth notes initial jobless claims provide a helpful “real-time” guide on the state of the jobs market. “Initial claims continue to hold within a modest range, which shows that the labor market remains stable for now,” says Haworth.8
Bond markets appeared to anticipate September’s fed funds rate cut. From April through mid-September, yields on the 10-year U.S. Treasury bond trended lower. However, since then, longer-term bond yields moved higher.9
Increases in long-term bond yields appeared to be in response to continued strong economic data. The impact to consumers is felt, for instance, in higher mortgage rates. Powell noted that the recent uptick in long-term yields limited fed funds rate cut benefits. “The big increase in mortgage rates, from 6.2% to 7% in the past seven weeks, hits harder than a quarter-percentage point drop in a credit card rate,” says Powell.1
10-year Treasury bond yields rose significantly on November 6, the day after former President Donald Trump was re-elected to office. It may have represented the market’s initial read on the potential impact of Trump’s economic policy proposals, including plans to raise tariffs, which could have inflationary implications. Powell, for now, downplayed possible monetary policy ramifications. “In the near term, the election will have no effect on our policy decisions.”1
Markets anticipate one more 2024 fed funds rate cut, coming at the FOMC’s mid-December meeting. This is based on the CME FedWatch Tool, which analyzes the probabilities of fed fund rate changes based on interest rate trader actions. The tool indicates the likelihood of a 0.25% rate cut in December.10
As the Fed continues to address monetary policy, be sure to consult with your financial professional and review portfolio positioning. Explore whether changes might be appropriate given your goals, time horizon and feelings toward risk in today’s evolving interest rate environment.
Monetary policy is controlled by a nation’s central bank, which in the United States, is the Federal Reserve (Fed). The Fed’s management of monetary policy can have a significant impact on the shape of the nation’s economy. Congress’ mandate for the Fed is to maintain price stability (manage inflation); promote maximum sustainable employment (low unemployment); and provide for moderate, long-term interest rates. Fed monetary policy influences the cost of many forms of consumer debt such as mortgages, credit cards and automobile loans.
The Fed is the nation’s central bank, and perhaps the most influential financial institution in the world. The central governing board of the Federal Reserve reports to Congress, with the chair of the Federal Reserve appointed by the President. There are also 12 regional federal reserve banks that are set up like private corporations.
The Federal Reserve’s Federal Open Market Committee (FOMC) sets a target interest rate policy for the federal funds rate. This is the rate at which commercial banks borrow and lend excess reserves to other banks on an overnight basis. The fed funds rate is raised or lowered usually to help impact underlying economic conditions. For example, in 2022, as inflation surged, the FOMC began raising interest rates to make borrowing more expensive and slow economic activity. That strategy was designed to ease pricing pressures and reduce the inflation rate. In periods when the economy is slow or in a recession, the Fed tends to lower rates to try to stimulate economic activity and help the economy expand again.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
As the Federal Reserve eases monetary policy with interest rate cuts, what opportunities does this create for bond investors?
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