Key Updates on the Economy & Markets
The major development in 3Q24 was the Federal Reserve’s decision to cut interest rates by -0.50%, the first rate cut of this cycle. It came as the Fed shifted its focus, with unemployment rising to a 33-month high and inflation moving back to target. In the equity market, stocks ended the quarter higher despite some turbulence, including a brief but sharp sell-off in early August. The S&P 500 posted its fourth consecutive quarterly gain and ended September near an all-time high. This letter recaps 3Q24, discusses the Fed’s first rate cut, examines the increase in market volatility, and looks ahead to the final quarter of 2024.
The Federal Reserve Cuts Interest Rates by -0.50%
In 3Q24, the Fed started the process of normalizing interest rates after a volatile five years. To recap, the Fed cut interest rates to near-zero during the COVID pandemic to support the economy. It kept rates near 0% until March 2022, when it began raising interest rates in response to soaring inflation. From March 2022 to July 2023, the central bank raised rates by +5%, one of the largest and fastest rate-hiking cycles in recent decades. The Fed held interest rates steady for over a year as it waited for inflation to return to its 2% target, and after 14 months, it started the rate-cutting cycle with a -0.50% cut at its September meeting.
The Fed’s transition to cutting interest rates comes as its focus shifts from lowering inflation to supporting the labor market. Since the last rate hike in July 2023, inflation has dropped from 3.3% to 2.6%. However, over the same period, unemployment has risen from 3.5% to 4.2%, the highest level since October 2021. The Fed is more confident that inflation will return to its 2% target, but it’s concerned about the health of the U.S. labor market. The key question for the Fed and investors is what the labor market softening over the past year represents. Is the labor market simply normalizing after experiencing significant disruption during the pandemic, or is it an early sign of weakening labor demand? This uncertainty is one reason the Fed moved to cut interest rates.
Investors expect the Fed to cut interest rates at its two remaining meetings this year, with further reductions expected in 2024. Read more including graphs by downloading our Q3 2024 Recap & Q4 2024 Outlook PDF below: