The 2024 September meeting of the Federal Reserve was historic in the field of monetary policies. This is because after a cumulative increase in the rates by 525 basis points since 2022, the Federal Reserve decided to maintain the status quo. It kept the target federal-funds rate at 5.25–5.50%, a range that has stayed the same since late 2023.
The decision was based on the assumption that inflationary pressure was gradually subsiding, but the economy continued to grow albeit at a slower pace. It was an event that offered a sigh of relief for volatile markets. The question arose whether it was time to expect a pivot from the Fed or not. In its statement, the policymakers were patient and noted that “mission not accomplished”.
Inflation: From Crisis to Containment
By mid-2024, headline inflation had fallen to 2.8%, down from its 2022 high of over 9%. The slowdown was attributed to multiple sources: lower energy prices, more stable food prices, and supply chain normalization. Core inflation, which excludes food and energy, remained stuck at 3%, indicating that inflation pressures in housing, healthcare, and services had been falling at a slower pace.
"The economy’s inflation is moving in the right direction but is not yet at target," Federal Reserve Chairman Jerome Powell stated during his Jackson Hole speech. The statement was an acknowledgment by the central bank that while there had been significant progress in fighting inflation, there would be further turbulence in reaching the 2% target.
Growth without overheating
There was moderation in economic activity without stopping growth. Real GDP grew by 1.9% on an annual basis in Q2 2024, balancing slowing consumer spending and strong investments by companies. The unemployment rate increased slightly to 4.1%, signaling moderation rather than weakness. While manufacturing slowed slightly, there was still strength in employment in services, construction, and technology.
Profits were flat, but still in positive territory. Many analysts said this was a case of "soft landing"—meaning inflation fell without a major economic downturn occurring. For Powell and other policymakers, holding rates helped give them some more time to be certain that lower inflation was sustainable.
Financial Conditions and Credit Markets
The rate hike decision of the Fed had an impact on the financial conditions and credit markets. First of all, the bond yields were stable; the 10-year bond yield was fluctuating in the range of 4.2%. The mortgage rates were still high and were fixed at 6.7% level, which maintained the stability in the market while preventing any speculation. The credit spreads were narrowing down as investors had become convinced that the Fed had finally ended the hiking period.
After the stress experienced by regional banks in 2023, banks started providing credit to consumers and small businesses again.
Rebalancing of the Labor Market
Rebalancing of the labor market is yet another pillar of the Fed's approach. Until September 2024, the number of jobs offered to people exceeded the number of the unemployed by about 1.5 to 1. This indicated an imbalance, which pushed wages up and kept inflation going. However, by September the balance was restored to nearly equal numbers. Average growth in hourly pay slowed down to 3.8%, reflecting productivity gains and inflation trends.
According to Powell, this is "rebalancing without breaking." This way, inflation driven by wages could be brought down without mass layoffs. The participation rate in the labor market, especially for prime-age people, reached its highest rate in more than 20 years.
Conclusion
Markets React: Relief and Restraint. The equity market reacted positively to the decision. In the two weeks after the September decision, the S&P 500 rose by 6%, and the Nasdaq reached a year-to-date high on the strength of tech and growth stocks. Markets viewed the delay as an affirmation of credibility, proof that the Fed could contain inflation without choking off growth.
Still, there were no false hopes. Analysts cautioned that a soft landing would easily morph into a "no landing" situation should consumption turn too vigorous again. The bond market priced in interest rate cuts starting in mid-2025, but the Fed refused to commit to that timeline. "We're not in any rush," Powell said plainly. "There's more danger in waiting than there is in moving too soon."