The latest cycle of easing from the Federal Reserve was initiated at the recent Federal Open Market Committee gathering by decreasing the federal funds rate by 0.5%. This decision was well-anticipated by the market participants, who foresaw a larger rate cut instead of the expected 0.25%.

Fed Chair Jerome Powell, during the post-meeting press conference, expressed growing confidence in reaching the target inflation rate of 2%, along with a cooling labor market over the past three months. This shift indicated a preference in preserving the job market’s stability rather than risking inflation or unemployment worsening.

The uncertainty now lies in the forthcoming easing strategy. John Authers, from Bloomberg, mentioned that expectations for more significant subsequent rate reductions were lessened by Powell, who cautioned against assuming that the recent rate cut pace would continue, given the economy’s current strength.

Projections indicate that the Fed funds rate will decrease to approximately 3.25-3.5% by the end of the upcoming year, aligning closely with the bond market estimates. This scenario would mark a deviation from past aggressive rate cuts experienced post-crisis situations, owing to the present lack of imminent recession signs and financial market stability.

The lack of precedent in the current economic cycle makes it challenging for policymakers and investors to navigate. Despite financial market turbulence intensifying due to job growth slowdown concerns, the consensus by Fed officials is that the possibility of an economic slowdown is minimal, with unemployment rate projections foreseeing marginal increases.

While the Fed has emphasized that decisions will be dictated by economic data, investors worry about a potential delay in responding to looming recession risks. Recent surveys reveal that global monetary policies are perceived as being the most restrictive post-financial crisis, yet a U.S. “soft landing” remains the most probable outcome.

One suggested rationale for Fed rate cuts is the need for neutral monetary policy as inflation edges closer to the 2% target. Real interest rates post-soft landing are expected to settle around 1-1.5%, a significant reduction from the pre-ease levels of about 3%, as inflation nears the 2% mark in the future.

The impact of fiscal policy in this scenario has also drawn attention, especially considering the role it played post-pandemic and the potential outcomes of various tax policies proposed by political candidates. The forthcoming 2025 fiscal decisions concerning tax cuts and budget allocations are poised to impact economic growth positively or negatively.

The high level of ambiguity around economic policy proposals from the contenders and the impending election results make it challenging to assess their potential impacts. Once the election outcomes unravel and the fiscal policy stance becomes explicit, the Federal Reserve will then need to evaluate and respond to the economic implications that ensue.