Knightley explained that the Federal Reserve’s current approach is focused on risk management. Unlike most central banks, which have the single goal of bringing inflation down to 2%, the Federal Reserve has two main targets: controlling inflation and maximising employment. If the Fed is confident it’s on track to reach its inflation goal, it could shift some focus toward supporting employment.
The Fed is aiming to achieve a “soft landing,” where they slow the economy enough to reduce inflation but avoid a recession. Knightley suggests that the Fed may soon move from a restrictive policy, which is slowing economic activity, to a more neutral stance. This would give the economy more room to grow, while still keeping inflation under control.
According to Knightley, a 25-bps cut in November followed by another in December would fit well with this approach. He also predicts that the Fed could lower rates to around 3-3.5% by the summer of 2025.
Also Read: How US Fed rate cut affects global equity markets and commodities–experts weigh in
On October 1, Federal Reserve Chair Jerome Powell stated that the central bank plans to lower rates “over time.” He emphasised that the US economy remains strong and expressed confidence that inflation is moving toward the Fed’s 2% target. Powell added that current economic conditions are setting the stage for further easing price pressures.
Also Read: Jerome Powell says US Fed not in a hurry, will lower rates ‘over time’
On September 18, 2024, the Fed made its first interest rate cut in more than four years, reducing the benchmark lending rate by 50 basis points. This move was intended to counter the slowdown in the labour market. The Federal Open Market Committee (FOMC) lowered the key overnight borrowing rate, meeting market expectations, although some had hoped for a smaller 25 bps cut.
Also Read: US Fed slashes rates by 50 bps — Jerome Powell’s top quotes on economic outlook
As a result, the Fed has reduced its key interest rate to about 4.8%, down from a peak of 5.3% earlier in the year. This followed 11 consecutive rate hikes since 2022, aimed at reducing inflation after it surged to its highest levels since 1981 due to the pandemic and increased consumer demand.
For more details, watch the accompanying video
(Edited by : Unni Krishnan)
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