December 2024 – how much and what is next for the economy

The Federal Reserve announced a quarter-point cut in key interest rates on Wednesday, an effort to steady what appears to be a stable but cooling economy.

It is the central bank’s third rate cut in 2024. The measure reduces the Fed’s target interest rate to between 4.25% and 4.5%.

In its statement announcing the cut, the Fed now projects just two rate cuts for 2025. It said the unemployment rate remains low while the inflation rate “remains somewhat elevated.” A separate document released by the Fed on Wednesday now indicates that central banks do not believe they will reach their desired 2% inflation target before 2026.

Economists surveyed by Bloomberg had expected three cuts next year, believing the economy and price growth would have cooled further by now.

The Fed’s actions are designed to prevent the economy from overheating when growth is strong or falling into recession when it is slow. To do this, it changes what is known as the federal funds rate, which helps set borrowing rates in the rest of the economy. By making it easier – or harder – to borrow, the Fed seeks to control the pace of economic growth.

Right now there is intense debate about which one is most likely to happen in the future.

Currently, the pace of inflation remains well below its post-pandemic highs. But last week, the Bureau of Labor Statistics reported that the 12-month consumer price index (the most widely watched inflation gauge) had risen 2.7% for the month of November — above the 2.6% pace from the previous month.

Consumers seem unfazed. On Tuesday, the Census Bureau reported that retail sales rose 0.7% in the month, ahead of forecasts of 0.6%, while the October figure was revised up to 0.5% from 0.4%

These data points suggest that the economy remains on relatively solid footing, but there are some warning signs flashing about underlying weaknesses — something that would justify the looser monetary policy that the Fed, not to mention President-elect Donald Trump, has sought.

Most worrying is the labor market, where job growth has largely been concentrated in sectors such as healthcare and state and local government. These sectors tend to say little about where we are in the business cycle.

Meanwhile, the pace of job gains in sectors that normally point to continued growth, such as manufacturing, business and professional services, has largely slowed.

Overall, hiring rates have plummeted, while job openings continue to decline.

Finally, after an incredible bull run for most of 2024, some stock indexes are pulling back from all-time highs. The Dow Jones Industrial Average has been in the middle of a nine day losing streakits worst multi-day performance since the 1970s.

Right now, market participants overwhelmingly believe that after the Fed announces its quarterly point rate cut for December, it will “pause” and hold interest rates steady at its January meeting to assess how overall financial conditions are faring.

For the most part, analysts remain relatively happy with the current situation. A new Bank of America survey shows that the Fed still appears to be providing a “soft landing” for the US economy, with unemployment and inflation remaining relatively low.

But if anything, according to Goldman Sachs analysts, inflation was expected to have fallen even more by now, something that would have come at the cost of slightly higher unemployment.

“Unemployment is no longer rising as fast” as it was earlier this fall, those analysts said in a chart accompanying a recent note to clients. Still, they said, “it is too early to conclude that the broader labor market data has stabilized convincingly.”

Even with a still shaky labor market, Federal Reserve officials have signaled they may slow the pace of cuts soon — not only in response to stickier inflation, but also because of uncertainty about the incoming Trump administration’s tariff policy.

To illustrate the Fed’s thinking, the Goldman analysts pointed to a speech this month by Beth Hammack, president of the Federal Reserve Bank of Cleveland, explaining the situation.

“Resilient growth, a healthy labor market and still elevated inflation suggest to me that it remains appropriate to maintain a modestly restrictive stance on monetary policy for some time,” Hammack said. “Such a policy will help to sustainably return inflation all the way back to 2 percent in a timely manner.”

There has also been a broader rethinking of whether interest rates should generally be higher given structural changes that may occur in the economy that have led to faster growth, such as large fiscal deficits and increased productivity growth.

While the 2008 financial crash set the stage for more than a decade of low interest rates, Hammack said, “some of the forces that appeared to be holding down the neutral rate after the global financial crisis may have finally run their course or reversed.”

Investor and economist sentiment has also become more uncertain about the impact the Trump administration will have on the economy. In particular, the fear that the tariffs will increase prices has become widespread.

“When it rains, it rains on everybody,” Gary Millerchip, CFO of Costco, said on the company’s latest earnings call.

Still, the bottom line appears to be relatively smooth, thanks to Trump’s pro-business agenda. Not only did the Bank of America survey show an eight-month high of 33% of respondents expecting the economy to continue growing at a steady clip, but only 6% expected a recessionary scenario — a six-month low. Meanwhile, overall investor sentiment remains “super bullish,” with funding allocations to stocks at highs and cash at low point – about hope for ongoing consumption and cheaper financing after Trump’s accession.

Ironically, when sentiment reaches this level, it is usually a sell signal, Bank of America said in the note.