The US Federal Reserve has a dual mandate. It aims to keep the consumer price index (CPI) measure of inflation rising by 2% per year and also tries to maintain full employment in the economy (although it does not have a specific target for the unemployment rate).

When the CPI deviates too far from 2% or if there is a dramatic shift in the labor market, the Fed will raise or lower the federal funds rate (also called the overnight interest rate) to influence economic activity.

At its September meeting, the Fed’s Federal Open Market Committee (FOMC) decided to cut the federal funds rate by half a percentage point. The November FOMC meeting is scheduled for next Wednesday and Thursday, so is another cut on the table?

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Here’s why the Fed cut rates in September

In 2022, CPI rose to a 40-year high of 8%. There were a number of contributing factors:

• In 2020 and 2021, the US government injected billions of dollars into the economy to offset the negative effects of the COVID-19 pandemic.
• In March 2020, the Fed cut interest rates to an all-time low of nearly 0% for the same reason. In addition, it injected trillions of dollars into the financial system quantitative easing (QE).
• COVID-19 has caused factories to close all over the world, leading to shortages of consumer goods and skyrocketing prices.

That inflation cocktail provoked a decisive response from the Fed. It raised the federal funds rate to a two-decade high of 5.33 percent over 18 months, with the last hike due in August 2023.

Fortunately, that policy tweak worked. CPI reached 4.1% in 2023 and fell further to an annualized rate of just 2.4% as of the latest reading in September 2024. Hence EDF decided it was appropriate to cut rates by 50 basis points (one basis point is equal to 0.01 percentage point) at its last meeting.

Will there be another sale in November?

Another rate cut looks highly likely next week as inflation is clearly trending towards the Fed’s 2% target. In addition, the unemployment rate rose from 3.7% to 4.1% this year, signaling that there may be weakness in the labor market.

Fed Chairman Jerome Powell recently said downside risks to employment have increased, so more rate cuts are likely appropriate to support economic growth before further deterioration.

According to the forecast provided by FOMC in September, the federal funds rate could fall by another 50 basis points before the end of 2024. With only November and December meetings remaining, the most likely outcome is two 25 basis point cuts.

Exactly that CME GroupIts FedWatch tool predicts. It suggests there is a 95% chance of a 25 basis point cut at next week’s meeting, followed by a 78% chance of another December cut of the same size.

Discount rates are usually good for long-term stocks

The FOMC forecast suggests that there could be another 125 basis point cuts in 2025, with a final cut of 25 basis points in 2026. This could bring the federal funds rate to 2.88%, which would decrease by nearly half from its recent peak. .

Lower interest rates are usually good for the stock market in the long term. Businesses can borrow more money to fuel their growth and interest costs are lower, which is a direct tailwind for GAINS. Lower rates also put more money in consumers’ pockets, which they can spend throughout the economy.

However, there is a caveat. Investors don’t want to see interest rates fall due to an economic emergency (such as a pandemic or financial crisis) because that would be a drag on corporate earnings, which would cause stock prices to fall. That’s not a concern right now, but it’s a good idea to keep an eye on the unemployment rate — if it continues to rise, that could be a sign that there’s trouble on the horizon.