US Fed Interest Rate Decision: July 2024 Highlights

Interest Rates Held at Over Two-Decade High

The US Federal Reserve, in its fifth interest rate decision for 2024, maintained its key benchmark interest rates in the range of 5.25% to 5.50%. This decision marks the eighth consecutive meeting where the rates have remained unchanged, aligning with Wall Street expectations. The Fed's aggressive monetary tightening cycle, initiated in March 2022, has raised policy rates by 5.25 percentage points, a response to the worst inflation in 40 years.

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Since the onset of this cycle, annual inflation has dropped from a peak of 9.1% in June 2022 to 3.2%. Despite this progress, the high borrowing costs have made financing more expensive for businesses and households, potentially slowing down economic activity.

Powell Fuels Rate Cut Speculation for September

Federal Reserve Chair Jerome Powell has hinted at a potential rate cut in the upcoming September meeting. This would be the first reduction in rates in four years, contingent on continued progress towards the Fed's twin objectives of managing inflation and maintaining employment. Powell emphasized the significant decline in inflation and suggested that the Fed is nearing the point where a rate cut would be appropriate.

However, he cautioned that the Fed needs more confidence that inflation is sustainably moving towards the 2% target before making any changes.

Slowing the Pace of Balance-Sheet Runoff

The Fed announced a slowdown in the pace of its balance-sheet runoff, which involves reducing holdings of Treasury securities, agency debt, and mortgage-backed securities. Starting June 1, the Fed will allow $25 billion in Treasury bonds to run off monthly, down from the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion per month. This quantitative tightening process has been in place since June 2022, gradually reducing the Fed's bond holdings by up to $95 billion per month.

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Economic Outlook and Rate Cut Considerations

Chair Powell provided limited guidance on the frequency of potential rate cuts, stating that the scenarios could range from no cuts to several cuts by year-end. He described the US economy as being in a favorable position, with declining inflation and steady hiring, though wage growth has cooled. This cooling can help reduce inflationary pressures as businesses are less likely to raise prices to offset higher labor costs.

The US unemployment rate has ticked higher over the past three months, leading some economists to advocate for more rapid rate cuts to support the economy.

Wall Street Reaction: Best Day in Five Months

Following the Fed's announcement, the stock markets responded positively. The Dow Jones Industrial Average rose by 99.46 points to 40,842.79. The S&P 500 and Nasdaq Composite Index had their best day since February, with gains of 1.6% and 2.6%, respectively. Traders are now increasingly betting on a rate cut in September, with CME Group data showing a 100% probability for such a move.

Despite Powell's comments that a 50-basis-point cut is not being considered, futures traders remain optimistic about a series of quarter-point cuts starting in September. Analysts are divided, with many predicting two or three cuts over the final three meetings of 2024, potentially lowering the policy rate to a range of 4.5% to 4.75%.

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(By Medhansh Bairaria)