As expected, the Federal Open Market Committee has ended its December 2024 meeting by cutting the Fed Funds rate by 25 basis points to a 4.25% to 4.50% target. The Fed's decision follows a 50 basis point cut in September and a 25 basis point cut in November. The Fed funds rate now stands a full percent below where it was just three months ago and where it had stood for most of 2024 (the Fed raised interest rates by 25 basis points in January for its final move of this cycle).
The December decision was not unanimous with Cleveland Fed President Beth Hammack voting against the move and preferring to keep rates steady. Hammack's dissent is indicative of an underlying unease with the pace of inflation remaining above the Fed's 2% target. Chairman Jerome Powell's statement indicated concern as well, guiding to only two cuts in 2025 (previous guidance had been for four). Powell also refused to rule out further rate hikes, saying: "You don't rule things completely in or out in this world." Monetary conditions may also need to remain tight as a precaution should tariffs and mass deportations result in dramatic changes in costs and labor conditions.
As a result, the 2-year Treasury rates quickly moved from around 4.23% to 4.35%.
It seems pretty clear - at least for now - that the era of very low interest rates that existed from 2008 to 2020 is gone. It also seems pretty clear that the era of inverted yield curves that existed since 2021 is also going to be leaving. With Treasuries of 2 years and longer now yielding more than short term Treasuries, those willing to tie up their cash for longer periods will begin to see a time premium. We expect to see banks begin to compete for deposits by offering 1-year CDs and 2-year CDs that offer a significant yield premium to online savings rates.
The Federal Reserve has ended its November 2024 meeting with a 25 basis points cut.
This cut follows 50 basis point cut in September and the Fed Funds rate now sits 75 basis points below its 5.25 to 5.50% range which marked the high for this cycle.
The pace of Fed cuts is now very much in question following the second election of Donald Trump. Whereas the Fed was previously focused entirely on incoming inflationary data, it now needs to focus as well on fiscal policy issues - including the possibility that tariffs, deportations and increased deficit spending - may be inflationary.
Even prior to Trump election, all Treasury rates longer than 6 months stood at much higher yields than they had for several months. It is more clear than before that the Fed's rate cutting efforts to bring rates down to around 2% will play out over quarters or years and not monthly meetings.
Now that the uncertainty of the election is over, we'd expect to see banks become much more competitive with their 1-year CD and 2-year CD offerings, even as the best savings rates may fall.
The Federal Reserve acted as expected to lower the benchmark Fed funds rate for the first time in this cycle. Market observers had fully expected a rate cut going into the September 2024 meeting, but had been divided between a 1/4 point and a 1/2 point hike. The Fed chose to start with a larger move, which Federal Reserve Chairman characterized as a decisive recalibration towards a more neutral stance (as opposed a restrictive stance), lowering the rate by 50 basis points to a target of 4.75 to 5.00%.
While the decision was not unanimous, the Fed's large move indicates that it believes that it has largely restored price stability with inflation measurements indicating that the pandemic price burst has eased and inflation is well on its way to the Fed's 2% target.
The Fed has been somewhat reluctant to provide further guidance on additional rate moves. Bond markets is clearly pricing in at least one additional 25 basis point cut before the end of 2024 and several additional cuts in the first half of 2025.
