AMSCI NEWSLETTER September 2024

The Federal Reserve on Sept. 18 announced a half-point cut to interest rates, signaling the central bank’s assessment that inflation is no longer the primary threat to the economy.

The move to reduce the target range for the Federal Funds Rate to 4.75-5 percent (down from 5.25-5.5 percent) marked the first time that the Fed has reduced rates since it dropped them to just above zero as an emergency measure at the start of the pandemic in March 2020.

A quarter-point reduction had been considered a near certainty, with a half-point cut generally thought to be possible but much less likely.

“Job gains have slowed, and the unemployment rate has moved up but remains low,” the Federal Reserve’s Federal Open Market Committee said in announcing the reduction. “Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated. … The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

Fed Chair Jerome Powell reiterated those comments, noting in a press conference that “The labor market has cooled from its formerly overheated state [and] inflation has eased substantially.”

“Our intention is really to maintain the strength that we currently see in the U.S. economy,” Powell said. “And we’ll do that by returning rates from their high level, which has really been – the purpose of which has been to get inflation under control. We’re going to move those down over time to a more normal level.”

When asked if the Fed was “effectively declaring a decisive victory over inflation and rising prices,” Powell said that it is not, particularly since inflation remains above the central bank’s target of 2 percent.

“We’re close, but we’re not really at 2 percent,” Powell said. “And I think we’re going to want to see it be, you know, around 2 percent, and close to 2 percent, for some time. But … we’re not saying mission accomplished or anything like that. But I have to say, though, we’re encouraged by the progress that we have made.”

Year-over-year inflation peaked at 9.1 percent in June 2022, leading the Fed to aggressively raise interest rates over the next year, during which time inflation dropped below 4 percent but stubbornly stayed above 3 percent until recent months.

In August, prices were 2.5 percent higher than they were in August 2023, according to the Bureau of Labor Statistics, which noted that this was “the smallest 12-month increase since February 2021.” Shelter costs were up 5.2 percent compared to 12 months earlier – and 0.5 percent from the previous month – and were “the main factor in the all items increase.” Energy costs, which contributed to inflation increases in recent years, partly because of the economic impact of Russia’s invasion of Ukraine, decreased by 4 percent during those 12 months.

The 50-basis point reduction was opposed by one member of the Federal Open Market Committee, who preferred a 25-point cut.

Stock markets responded favorably to the Fed’s announcement, with the Dow Jones Industrial Average gaining 1.4 percent in the two days following it to close at 42,063.36 on Sept. 20, up 11.6 percent on the year. The S&P 500 Index, meanwhile, went up 1.5 percent in the 48 hours after the announcement to 5,702.55, for a year- to-date gain of 19.6 percent.

The Bureau of Labor Statistics also reported that the economy added 142,000 jobs in August, a smaller monthly number than has been typical during the past four years. Also, data updates and revisions showed that some of those monthly numbers were not as high as initially estimated, as the number of jobs created between April 2023 and March 2024 was reduced by 28 percent, or 818,000 positions.

“Both the unemployment rate, at 4.2 percent, and the number of unemployed people, at 7.1 million, changed little in August” from July, the bureau stated. “These measures are higher than a year earlier, when the jobless rate was 3.8 percent, and the number of unemployed people was 6.3 million.”

The economy grew at an annualized rate of 3 percent during the second quarter, according to the Bureau of Economic Analysis, which noted that the gains “primarily reflected increases in consumer spending, private inventory investment, and nonresidential fixed investment.”

Confidence in the manufacturing sector was largely unchanged from July to August, as the Institute for Supply Management’s Purchasing Managers Index remained below the threshold delineating growth and contraction in the sector for the fifth straight month. The index has reached the level indicating expansion only once in the past year – and then just barely.

“Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty,” the chair of the institute’s Manufacturing Business Survey Panel said, prior to the Federal Reserve’s interest rate announcement. “Production execution was down compared to July, putting additional pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe.”

Consumer confidence is holding steady, a critical measure in a country in which consumer spending accounts for more than two-thirds of economic activity. The most recent measures of both The Conference Board’s Consumer Confidence Index (August) and the Index of Consumer Sentiment from the University of Michigan Surveys of Consumers (September) increased slightly from the prior month, though analysts with both groups noted concerns about employment.

The Conference Board’s chief economist said that “Consumers’ assessments of the current labor situation, while still positive, continued to weaken, and assessments of the labor market going forward were more pessimistic,” while the Surveys of Consumers director observed “a modest weakening in views of labor markets.”

Housing starts increased 9.6 percent from July to August and were 3.9 percent higher than the August 2023 level, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales dipped 2.5 percent from July to August and slid 4.2 percent from a year earlier, the National Association of Realtors reported.

“Home sales were disappointing again in August, but the recent development of lower mortgage rates coupled with increasing inventory is a powerful combination that will provide the environment for sales to move higher in future months,” the association’s chief economist said.

The next few months should give some indication of whether the half-point reduction in interest rates is increasing confidence and making people more likely to build and buy homes. Some analysts predict that the Fed will cut rates one more time before the end of the year – the central bank has two meetings remaining in 2024 – though the unexpectedly aggressive cut in September could make another reduction less likely. As for the possibility of a series of cuts bringing rates back down to pre-2023, near-zero levels, Powell said, “My own sense is that we’re not going back to that but, you know, honestly, we’re going to find out.”