Federal Reserve policy in 2020 was driven by the expected devastating impact of COVID on the economy. Two interest rate cuts in March returned the fed funds rate to its historical low of 0.00 – 0.25%, matching the rate that was implemented during the financial crisis. The historically low funds rate, combined with fiscal policy, helped spur an economic rebound. In 2022 the focus of the Federal Reserve, and central banks around the world, shifted to increasing interest rates to fight inflation. From a historic low of 0.00 - 0.25%, the fed funds rate hit 5.25 - 5.50% in July 2023. Central banks around the world raised interest rates to lower consumer and business spending, which in turn would lower inflation. The European Central Bank, Canadian Central Bank, Bank of England, and Australian Central Bank all implemented several interest rate increases between 2022 and 2023. Inflation was a global problem; central banks around the world raised interest rates to decrease interest rate sensitive consumer and business spending. The objective of the rate increases was to lower consumer and business spending, which in turn would lower inflation through reduced demand for goods and services even though global factors were the primary drivers of inflation. Interest Rate 2025 Preview The Federal Reserve has the dual mandate of achieving maximum employment with low and stable inflation through its monetary policy. The 75-basis point decrease in interest rates that occurred in September and November reflects the significant drop in inflation and cooling of the labor market. It’s a balancing act for the Federal Reserve, putting interest rates at a level that promote economic growth and maximum employment, yet also puts consumer and business spending at a level that provides low and stable inflation. Although more interest rate cuts are possible in 2025, any future interest rate cuts are subject to changing economic conditions. The labor market and the level of inflation will be key benchmarks for any Federal Reserve decision to change interest rates. A new President and administration also increase the uncertainty in 2025 for economic growth, with potential changes in tariffs and trade policies, federal government spending, labor market regulations, administration of monetary policy, and taxation. Growing economic uncertainty was reflected by the change in short-term and long-term interest rates in late 2024. Although the Federal Reserve lowered the fed funds rate (a short-term rate) in September and November, long-term interest rates (including mortgage rates) increased. The chart below shows the change in short-term and long- term interest rates between September 26 and November 7 for selected Treasury securities and the 30-year fixed mortgage rate. Increasing long-term economic uncertainty contributed to increasing long-term interest rates, even though short-term interest rates decreased.
Yield on Selected Treasury Securities and 30 Year Fixed Rate Mortgage (Sources: Federal Reserve Economic Database)
Date
1 Mo Treasury
1 Yr Treasury
5 Yr Treasury
10 Yr Treasury
20 Yr Treasury
30 Yr Fixed Mortgage
09/26/2024 11/07/2024
4.90 4.69 -0.21
3.96 4.28 0.32
3.55 4.17 0.62
3.79 4.31 0.52
4.17 4.62 0.45
6.08 6.79 0.71
Change
The Federal Reserve will meet one more time in 2024, on December 17, setting the stage for interest rates in 2025. The CME FedWatch Tool provides insight as to what the financial markets expect for interest rates based on fed funds futures pricing. As of mid-November, the financial markets anticipated a greater than 70% chance that the fed funds rate will be cut again in December by 25 basis points. The Labor Market 2024 Since 2021, the U.S. labor market has been strong based on a variety of measures, including job growth, total employment, and the unemployment rate. The table below shows monthly and total annual job growth from January 2020 through October 2024. 2021 and 2022 were the top two years for job growth this century, with 7.2 and 4.5 million jobs added, respectively. The United States had job growth every month from January 2021 through October 2024. The job growth that began in January 2021 led to record employment in October 2024. The prolonged period
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Center for Business and Economic Insight
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