The Federal Reserve has made a significant move by cutting interest rates once again. This decision is particularly beneficial for farmers and other business borrowers, yet the extent and speed of future rate changes remain uncertain. During its mid-September meeting, the Fed's Federal Open Market Committee (FOMC) decided to implement a quarter-point cut, adjusting the benchmark federal funds rate to a range of 4% to 4.25%. This reduction was widely anticipated due to recent signs of a weakening job market, as indicated by Fed Chair Jerome Powell in a preceding speech.
In a decisive vote, 11 out of 12 FOMC members supported the rate cut, while one member dissented, advocating for a half-point reduction. However, there was a lack of consensus regarding future rate cuts among the committee’s 19 members, which includes seven Fed governors and 12 Federal Reserve bank presidents. The “dot plot”, an economic projection tool used by the committee, revealed that 10 out of 19 members anticipate at least two additional quarter-point rate cuts by the end of the year. In contrast, two members expect only one cut, and seven predict no further reductions this year.
The Federal Reserve's primary goals are to maintain maximum employment and ensure price stability. Although employment numbers have appeared strong, inflation continues to stubbornly exceed the Fed's target of 2%. As a result, the Fed has opted to maintain a restrictive monetary policy. Recent months have shown a slowdown in job creation, leading Powell to state, “The balance of risks has shifted.” Despite these challenges, a rapid succession of interest rate cuts is not yet guaranteed.
The median GDP forecast from the FOMC members indicates a growth of 1.6% for this year, with a slight increase to 1.8% projected for the next year. While this growth is slow, it does not signal an impending recession. Powell noted that these forecasts are slightly more optimistic than those made three months prior. Notably, the dissenting vote for a more significant half-point cut came from Stephen Miran, who has served as chair of President Donald Trump’s Council of Economic Advisors.
President Trump has exerted unprecedented pressure on the Fed to expedite interest rate reductions, even attempting to remove Fed Governor Lisa Cook to install someone more aligned with his views. This political pressure raises concerns about the independence of the Federal Reserve. However, the strong support for the current quarter-point cut suggests a reassuring consensus among members. Powell emphasized that monetary policy decisions should be rooted in economic data rather than political influence, stating that such independence is ingrained in the Fed's core principles.
Excessive political pressure could backfire, potentially igniting inflation concerns among bond investors. If they perceive that the Fed is making decisions influenced by politics, long-term interest rates could rise. The Fed primarily influences short-term rates, while the long-term rates—which are crucial for farmers, ranchers, and other business borrowers—are determined by the bond market.
Uncertainty surrounds how far the Fed will lower interest rates, with Trump advocating for rates to fall several percentage points lower, potentially leading to negative inflation-adjusted rates. Historically, the Fed has aimed for a neutral rate of interest, which neither stimulates nor restrains economic growth. This neutral rate is generally considered to be about one percentage point above the inflation rate. With the Fed's inflation target set at 2%, the neutral rate is typically around 3%.
The latest dot plot indicates that a significant majority of the 19 committee members believe the federal funds rate will remain between 3% and 4% over the next three years, with none predicting it will dip below 2.3%. The median projections suggest a rate of 3.6% by the end of this year, decreasing to 3.4% by the end of 2026, and further down to 3.1% by the end of 2027. However, these forecasts are subject to change based on economic conditions. Powell acknowledged the inherent uncertainty in these projections, remarking, “Forecasters are a humble lot with much to be humble about.”
For ongoing insights and updates on the Federal Reserve's actions and their implications, follow Urban Lehner on X @urbanize.
