Federal Reserve cuts rates by 50bps as inflation cools, joining global trend of central banks easing.
The US Federal Reserve announced a 50bps rate cut today, in light of growing evidence that inflation is trending towards the 2.0% target as well as signs from CPI, unemployment, and consumer spending levels. With the Bank of Canada announcing a third consecutive interest rate cut earlier this month, the Federal Reserve joins other central banks in reducing interest rates amidst slower growth forecasts.
Federal Reserve’s outlook on managing inflation
The US Federal Reserve had signaled a transition to lower interest rates was coming; according to the Summary of Economic Projections published in June 2024, the Fed expects (but does not guarantee) the Federal Funds Rate to be around 4.5% by the end of 2024. This rate is projected to decline to 4.0% midway through 2025 and further reduce to 3.0% by the midpoint of 2026.
Several key drivers have led to the Fed’s highly anticipated first cut of 2024; local labor markets are tightening as employment increased less than anticipated and available job openings have declined. Discretionary income levels appear to be lower as costs of living remain high, and consumers have reduced spending activity in many areas. Businesses have also been scaling back as many firms have or plan to reduce staffing levels this year.
US CPI figures dropped to 2.5% in August (YoY) after a rise in July (2.9%). Shelter costs continue to be a significant challenge for Americans, while a small decline in energy prices (-0.8%) helped bring overall inflation slightly lower than anticipated. Despite these figures, core inflation was reported to remain firm at 3.2% (YoY) in August.
Interconnected Economies: Bank of Canada Forecast
In its July 2024 Monetary Policy Report, the Bank of Canada (BoC) outlined cautiously optimistic economic forecast, similar to the US Federal Reserve. Canada’s overall GDP growth is projected to be about 2.0% in 2025 and 2.5% in 2026. The BoC also anticipates US Real GDP growth to be 2.1% in 2025, while growth in the Euro area is expected to be more modest at 1.3%.
The BoC has already reduced interest rates several times in 2024. Although the inflation levels are dropping and recent GDP figures are positive, in Q2 2024, Canada’s GDP per capita fell by 0.1%, the fifth consecutive decline.
Construction Industry Outlook
With our complex and globally interconnected economies, the pace of growth over the next few years remains uncertain. With interest rates decreasing and worldwide inflation moderating, most analysts see modest growth in major economies. BTY’s project data reveals lending is constrained in the US, and developers are looking to avoid the pain of higher borrowing costs by leveraging existing equity to advance projects.
Despite a challenging 2024, the industrial sector remains strong and a significant portion of BTY’s Lender Services portfolio across the United States. In addition, many states have made significant pushes to introduce more housing projects as high housing prices drive affordability down.
Today’s announcement provides the start of economic relief for consumers and investors, with the market already pricing more rate reductions in the near future. While interest rate changes take time to materialize across industries, this transition to lower rates should boost confidence for businesses ready to invest in future growth.
