By Zack Fritz, Sage Policy Group
In March 2022, the Federal Reserve began raising interest rates in order to quell what would become the worst bout of inflation in over forty years. Exactly 30 months later, at the Federal Reserve’s September 17-18th meeting, they began lowering rates, cutting the target range of the federal funds rate by 0.50 percentage points.
Economists almost unanimously agree that it was time, or past time, to begin lowering rates. Year-over-year inflation has slowed from a cyclical peak of 9.1% in June 2022 to just 2.5% in August 2024. That’s still above the Federal Reserve’s target of 2.0%, but not by much. Which is to say, it was a virtual certainty that the Fed would cut at their September meeting; the only question was whether they would start with a 25 or 50 basis point cut.
That they went with the larger initial reduction signals that the Fed, like a majority of economists, understands that the balance of risks facing the economy has shifted. The possibility that inflation will rebound now appears less worrisome than the notion that the labor market will weaken further in the coming months.
Indeed, labor market health has already started to deteriorate in recent months. Employers added fewer jobs from June to August—just 116,300 per month—than over any three-month span since the first half of 2020. At the same time, the unemployment rate has crept steadily higher, rising from 3.7% at the start of 2024 to 4.2% as of August.
These cracks in the job market, while worrisome when viewed in isolation, don’t signal a broader economic slowdown—at least not yet, anyway. Layoffs remain historically uncommon; just 1.1% of workers were fired in July, a lower rate than in any month on record before 2019. At the same time, the rate at which workers have quit their jobs, which was historically elevated during the early years of the pandemic, has now fallen below 2019 levels.
Even initial claims for unemployment insurance, our most real-time indicator of the economy, remain low by historical standards. Of course, it’s important to note that once initial claims start rising it’s almost certainly too late to save an economic expansion.
This labor market stasis, wherein quits, layoffs, and hiring have all slowed, is indicative of broader economic dynamics at the moment. Decisions are being delayed in the face of elevated uncertainty. With rate cuts just beginning and a looming presidential election, this paralysis will likely persist through the end of 2024.
Even beyond the end of the year, economic uncertainty remains elevated. Rate cuts will eventually stimulate certain economic segments, but other segments may yet be buffeted by the lag effects of elevated rates. Multifamily construction, for instance, has fallen back from the 50-year highs seen over the past few years. The homebuying market has also remained frigid, even as mortgage rates fall to levels not seen since early 2023.
Despite outstanding risks, the economy is in a better position than virtually anyone anticipated. Projections from the Federal Reserve’s staff now see two more 25 basis point cuts in 2024 and the equivalent of four 25 basis point cuts in 2025. While a soft landing is far from guaranteed, it appears likelier than not at this point.
