A Big Cut in September Kicked Off the Rate-Reduction Cycle;
Hiring in Credit-Intensive Industries Is Set to Rebound as Rates Fall
The Fed cut the federal funds target by half a percentage point at the September 18 decision, more aggressive than expected when they previously met in July. The Fed also signaled plans to cut rates by another half percent before year-end, with additional easing in 2025. Their pivot is a reaction to recent data showing the job market and inflation cooling more than expected. The July and August jobs reports were soft, and the preliminary benchmark revision of March 2024 payrolls (released in mid-August) reduced job growth between March 2023 and March 2024 by 818,000. Incorporating these data, job growth in the year through August averaged 157,000 per month, down considerably from 218,000 per month in the year through June, according to the (now revised) data available during the Fed’s July meeting.
In addition, the unemployment rate’s increase in July and August triggered the Sahm Rule. This is former Fed economist Claudia Sahm’s observation that when the unemployment rate’s 3-month moving average exceeds its 12-month low by half a percentage point or more, the economy has historically been in recession. Mid-2024 is likely an exception to the Sahm Rule, since increased immigration is fueling a burst of labor force growth (it’s hard to measure exactly how large this is, since the BLS’s household survey struggles to measure employment among recently-arrived immigrants). Even so, the Fed likely finds the Sahm Rule’s message persuasive: The job market is trending in the wrong direction. The Fed wants to break that trend and has good prospects for achieving that goal: Lower interest rates are likely to fuel a rebound of hiring in credit-intensive industries like housing, manufacturing, and retailing of big-ticket consumer products like cars, furniture, and appliances.
Inflation is slowing to near the Fed’s 2% target. A big part of the recent dip in inflation is due to lower energy prices. Despite OPEC supply restraint and geopolitical risks, U.S. production is strong and global energy demand is sluggish. Core inflation is a bit higher than total inflation, but core inflation, too, seems likely to slow further. Downward pressure on prices of durable goods like new and used autos persists, and the slower increases of house price indexes and rents on new residential leases in 2024 is expected to cool housing costs as measured by the PCE and CPI indexes in 2025. Comerica’s September forecast anticipates the Fed making quarter percentage point rate cuts at the November, December, January, and March decisions. The Fed is forecast to then switch to quarterly rate cuts for the rest of next year, reducing the target rate to a range of 3.00% to 3.25% by the end of 2025. The Fed could cut faster than this if the economy weakens materially, or slower if the large fiscal deficit (currently around 6% of GDP) or wars in oil-exporting regions cause inflation to rebound.
For a PDF version of this publication, click here: October 2024 U.S. Economic Outlook
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