• Stocks Blog
• January 3, 2025

A December Rate Cut by the Fed Seems Reasonable

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Recently, Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis, openly suggested that a rate cut could be a reasonable consideration during the upcoming December meetingThis statement has garnered significant attention and discussion in the markets, as adjustments to the Federal Reserve's monetary policy are closely linked to the trajectory of the global economy and the stability of financial markets.

Kashkari outlined multiple reasons supporting the idea of lowering interest rates:

• Resilience of the U.SEconomy: He highlighted how the U.Seconomy has demonstrated remarkable resilience in the face of rising interest rates, suggesting that the neutral rate of interest—which neither stimulates nor restrains economic growth—may be higher than previously anticipatedIf this resilience continues, it could indicate a structural increase in the neutral rate rather than a temporary one

  Therefore, a rate cut might provide additional support to the economy.

• Slowdown in Inflation: While the inflation rate in the U.Sstill exceeds the Federal Reserve's target of 2%, there have been signs of moderation in inflationary pressures in recent months, edging closer to the targetKashkari expressed confidence in continued declines in inflation, which would lessen the necessity for urgent rate cuts, yet he sees a rate decrease as a precautionary measure.
• Strong Labor Market: He emphasized the robustness of the current labor market, noting that unemployment is gradually decliningThis scenario creates room for lowering rates since doing so is unlikely to trigger excessive inflationary pressure.

Following Kashkari's remarks about the potential for a rate cut, the markets reacted swiftly, anticipating a cascade of effects:

• Financial Market Response: Rate cuts are generally perceived as favorable for the economy, potentially boosting both stock and bond markets
  • Bolstering Low-Altitude Infrastructure
  • Nasdaq 100 Set for Significant Breakthrough
  • The Fed's Internal Rate Debate
  • Oil Gains, Stocks Steady, Gold Languishes
  • U.S. Stock Indices End Lower

  Investors may increase their exposure to riskier assets, consequently propelling related markets upward.

• Currency Exchange Rate Fluctuations: A reduction in rates may lead to a weaker dollar, as lower interest rates diminish the attractiveness of dollar-denominated assetsThis could enhance the competitiveness of U.Sexports but might also raise import costs.
• Lower Borrowing Costs: A rate cut would directly decrease the borrowing costs for businesses and individuals, encouraging higher levels of consumption and investmentSuch activity could spur economic growth and alleviate downward pressures.
• Inflationary Pressures: Although Kashkari is optimistic about decreasing inflation, a rate cut could, to some extent, elevate inflationary pressuresNevertheless, considering the resilience of the U.Seconomy and the strength of the labor market, such pressures may be manageable.

However, the task of adjusting the Federal Reserve's policies is fraught with complexity, necessitating the consideration of multiple factors:

• Geopolitical Risks: Kashkari mentioned that geopolitical risks are paramount in shaping economic prospects, including international trade tensions and geopolitical strife that could influence the Fed's policy decisions.
• Economic Data and Expectations: The Federal Reserve closely monitors various economic indicators when formulating monetary policies, including inflation rates, unemployment rates, and GDP growth figures

  Changes in these data points could alter the Fed's stance and expectations.

• Market Reactions and Managing Expectations: The Fed must also consider how markets will react to its policy adjustments and manage expectations appropriatelyAn overly aggressive or rapid decrease in rates could provoke excessive market reactions and fluctuationsThus, the Fed must navigate this process with caution and steadiness.

Kashkari’s perspective on the plausibility of a December rate cut reflects a deep understanding of the current economic landscape and the Fed's long-term visionIn the context of a decelerating economic growth and easing inflation pressures, lowering rates is viewed as an effective tool to stimulate economic activityHowever, the process of policy adjustment is no small feat; it is complex and nuanced, requiring a careful balance of diverse elements.

As the Federal Reserve continues to monitor dynamic economic data—most notably employment figures and GDP growth—their decisions will guide future policy directions