In line with market expectations, the Fed maintained status-quo on the rates front. The Fed Funds Rate remains unchanged at 4.25% to 4.50%; over the course of three preceding policy meetings, the Fed has cut rates collectively by 1%. The resilience in labour markets and the recent uptick in headline inflation numbers were cited as the major factors influencing a wait and watch policy. In this context, the FOMC statements reads as, “Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”
Along with the due consideration to the dual mandate, the other factors that may have resulted in status quo are percolation of the rate cuts already effected and gauging the impact of Trump’s geological and economical policies on inflation and growth. Even as the president elect Trump has been vocal about lower interest rates, the political pressures may not necessarily shape the trajectory of monetary policy.
The Fed may bid its time and be gradual in easing the rates further. But the overall trend of policy rates moving southwards in the US is not expected to change course. The Fed in its fight against inflation, that had touched more than 40 year high, the policy rates were tightened by more than 5%. The 30 year mortgage rates from a low of around 2.7% at the start of 2021 touched a high of close to 7.8% by end of 2023, currently at 7%. The high interest rates and high property prices resonate with crisis witnessed in the housing market not so long back. The high borrowing rates would have ripple effects on other segments of the economy as well.
The Emkay Wealth view has been that the Fed Funds Rate is likely to touch the sub-4% level by end of 2025. This is quite likely. The Fed in its characteristic style has put it that any further rate action will be data dependent, we do not expect any dramatic changes in the current economic environment which may obviate the need for a further rate cut.