The Fed Eases Rates But What Comes Next?

The Federal Reserve on Wednesday announced another interest rate cut of 0.25%, taking the target range to 4.25%-4.50%, a full 1% lower since September. Two more 0.25% cuts are on the table for 2025, with the Fed eyeing a policy rate of 3.75%-4% by year-end. Chair Jerome Powell emphasized a more cautious approach to rate cuts going forward, emphasizing his view that the current Fed funds rate properly balances the Fed’s dual mandate of maximum employment and stable prices.

Rodney Sullivan,
Executive Director for the Mayo Center of Asset Management.

Rodney Sullivan, executive director of the Mayo Center for Asset Management at the University of Virginia Darden School of Business, provided analysis of the rate cut and way forward:

Market Signals
Despite the Fed’s easing, the bond market “vigilantes” have sent a different signal. The 10-year Treasury bond yield has jumped from 3.6% in September to 4.5% today, its highest since May. The combination of stimulative fiscal and monetary policy, alongside stiff import tariffs, may coalesce to push both economic growth and inflation higher, hence the rise in long-term bond yields. Meanwhile, the S&P 500 fell almost 3% and the Nasdaq dropped 3.5% Wednesday.

Fed Policy: Cautious Cuts and Inflation Outlook

Inflation still runs a bit above the Fed’s 2% target, hovering just under 3% on a year-over-year basis. The Fed expects inflation to continue its downward path but acknowledges that inflation has remained more stubborn than they had expected. The Fed believes it can afford to be more measured now that it believes it is “well balanced” between its employment and inflation goals. Powell’s comments suggest a shift from a steady path of easing to a more careful recalibration.

Policy Shifts Under the New Administration

For nearly two years, the U.S. economy has surprised most everyone on the upside. Employment growth has been resilient and real wages have risen. Consumers have also enjoyed a “wealth effect” from higher home prices and a buoyant stock market. The higher incomes have in turn boosted consumer spending. At the same time, robust corporate investment, especially in artificial intelligence (AI), has led to strong productivity gains and healthy corporate profits.

The incoming Trump administration could reshape the investment landscape. The GOP sweep in the recent elections has introduced the likelihood of measures likely to support the economy further. The net effect of fiscal stimulus and potential trade restrictions is certainly not straightforward, but lower tax rates for both businesses and individuals (including more generous child tax credit) combined with looser regulatory environment point to a continued stimulative environment for economic growth.

Looking Ahead: Cautious Optimism

As we move into 2025, the data continue to defy the naysayers that once dominated headlines. Consumers remain resilient, buoyed by a strong job market and rising incomes. Businesses have been spurred by technological advancements and robust profitability as well as fiscal and monetary policy support.

The Fed’s latest move signals confidence that the economic backdrop remains strong enough to warrant a continued gentle easing of interest rates. However, the journey to the Fed’s 2% inflation target could be hampered by sticky inflation, especially in services and shelter, which have remained stubborn. This could lead the Fed to pause for most, or even all, of 2025. Another risk lies in the possibility of recessions abroad. China’s economy is in rough shape and Europe presently finds itself in an economic and political malaise.

For now, the U.S. economic story is one of cautious optimism. If the past two years have taught us anything, it’s that the U.S. economy can be surprisingly resilient — even in a period of policy transitions and global uncertainty.  The possibility of ongoing corporate investments in AI alongside a more favorable tax and regulatory environment provide the backdrop for continued job growth and spending all together combining to support a steady economy.