Fed Cuts Interest Rates Amid Shift in Priorities
The Federal Reserve has made its move, slashing the fed funds rate by 25 basis points to a target range of 4.50%-4.75%. This marks the second rate cut since September, a significant departure from the rate-hiking trend that dominated 2022 and 2023.
A Strong Economy, But Caution Prevails
Despite the economy’s resilience and solid labor market, the Fed has adjusted its focus from combating inflation to safeguarding employment. The central bank’s decision reflects a subtle yet crucial shift in priorities.
Inflation Under Control, But Unemployment Rises
Since the Fed began raising rates in 2021, PCE inflation has plummeted from above 7.0% to a mere 2.1%, nearing the coveted 2.0% target. However, core PCE inflation, excluding food and energy, remains elevated at 2.7%. Meanwhile, the unemployment rate has climbed from 3.4% to 4.1%, and monthly payroll gains have slowed significantly, from 300k to 100k.
Fed Forecasts Revised
The Fed has revised its year-end target for the unemployment rate, increasing it to 4.4% from 4.0% last June. This adjustment suggests a more cautious approach, as the central bank navigates the complexities of the current economic landscape.
A Delicate Balance
As the Fed walks the tightrope between promoting growth and controlling inflation, its decisions will have far-reaching implications for the economy. With interest rates now lowered, the focus turns to the impact on employment, inflation, and the overall health of the economy.
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