In a notable decision, the Federal Reserve has once again reduced interest rates, a move that has been particularly welcomed by farmers and business borrowers. During its mid-September meeting, the Federal Open Market Committee (FOMC) opted for a quarter-point cut, lowering the benchmark federal funds rate to a range of 4% to 4.25%.
This decision came as the job market displayed signs of weakening, making the cut widely anticipated. Fed Chair Jerome Powell hinted at this possible scenario in a previous speech, and the vote reflected significant consensus: 11 of the 12 FOMC members supported the cut, with one member advocating for a more aggressive half-point reduction.
However, as the committee looks ahead, there is less clarity regarding the future trajectory of interest rates. Among the 19 FOMC members, which includes seven Fed governors and twelve Federal Reserve bank presidents, differing opinions emerged about future cuts. In recent forecasts, known as the “dot plot,” ten members predicted at least two more quarter-point cuts within the year, while two foresaw only one cut, and seven anticipated no additional reductions. It’s important to note that these projections reflect individual member opinions rather than formal policy commitments.
This recent rate cut comes after a long period where the Fed maintained its rates, following a significant reduction of one full percentage point during the last four months of 2024. The dual objectives of the Fed are to ensure maximum employment and to maintain price stability. While the labor market has shown some stability, inflation has persisted, remaining above the Fed’s desired target of 2%. Consequently, there are concerns about maintaining price stability, which influenced the decision to keep monetary policy somewhat restrictive.
Recent trends have indicated a stall in job creation, prompting Powell to remark that “the balance of risks has shifted.” Nonetheless, this shift does not guarantee a rapid series of interest rate cuts. The median GDP forecast among FOMC members is for a growth rate of 1.6% this year, with a slightly optimistic prediction of 1.8% next year, values that suggest slow but not recessionary growth.
Stephen Miran, the sole member advocating for a more significant half-point cut, has previously held a position as chair of President Donald Trump’s Council of Economic Advisors. It’s notable that President Trump has been increasingly vocal about his desire for the Fed to lower rates more aggressively, even seeking to influence the Fed’s board by attempting to replace Governor Lisa Cook. This pressure raises concerns about the independence of the Fed, an entity known for making decisions based on economic data rather than political considerations.
Powell emphasized that the Fed’s decision-making is deeply rooted in economic fundamentals and not driven by political pressures. However, potential political influences could unintentionally prompt inflationary fears among bond investors. If they suspect political motivations behind Fed rate decisions, long-term interest rates could rise, impacting farmers and business borrowers more significantly than short-term rates that the Fed controls.
The extent and pace of future rate cuts remain uncertain. While Trump has expressed a desire for rates to drop several percentage points—which would lead to negative inflation-adjusted rates—the Fed traditionally aims for what it terms the “neutral” interest rate. This neutral rate is one that neither invigorates nor slows economic activity, typically viewed as one percentage point above the inflation rate.
Despite variability in forecasts, the latest dot plot indicates that a majority of FOMC members expect the federal funds rate to remain between 3% and 4% over the next three years, with none projecting it to fall below 2.3%. The median projections foresee a rate of 3.6% by the end of this year, tapering to 3.4% in 2026 and 3.1% by 2027.
As economic conditions evolve, so too will these projections. At a recent press conference, Powell acknowledged the inherent uncertainty in forecasting, noting, “Forecasters are a humble lot with much to be humble about.”
