Heading into last Wednesday, it was practically a coin toss as to whether the Federal Reserve would lower interest rates by 0.25% or 0.50%. The coin landed showing 0.50%. Thus, the Fed took a bolder start in making its first interest rate drop since 2020. The calculus reflects so-called risk management concerns in which Fed officials weigh the risks of various economic hazards, such as high inflation or rising joblessness, and navigate accordingly.
The decision to trim rates by the larger of those two amounts moved the Fed unwaveringly into a new phase of its inflation battle. Fed officials seem to be gazing more into the economy’s employment situation and away from the inflation battleground, which arguably is a battle already being won. The Fed is now trying to prevent past rate increases, which last year took borrowing costs to a two-decade high, from further weakening the U.S. labor market.
Interest-rate projections show officials penciled in the equivalent of another four cuts of a quarter point next year, assuming the unemployment rate doesn’t jump and inflation continues to decline. That would take the fed-funds rate to just below 3.5% by the end of 2025. This is positive news for borrowers but unwelcome news for savers who turn towards conservative, income-producing investments.
There will always be “coin tosses,” economic uncertainties, when investing and doing personal financial planning. However, we believe a long-term investing approach coupled with patience can smooth out many of these external events.
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