The Federal Reserve steadily increased the Fed Funds target rate from 0.25% in the spring of 2022 to a very restrictive 5.50% in July of 2023, where it remained until Jay Powell announced that Fed policy will be “Recalibrating to Neutral” and cut it to 5.00% on September 18th, 2024. The “neutral” Fed Funds rate is the rate that is neither restrictive nor stimulative, believed to be 2.50%-3.00%.

The Fed’s dual mandate is to pursue stable prices and maximum employment. Inflation is falling in most developed economies and the Fed’s favorite U.S. inflation gauge, the core PCE (Personal Consumption Expenditures), is nearing its target of 2%. Starting in the spring of 2022, the Fed aggressively raised interest rates in order to slash inflation from about 9.00% to about 2.50%. Higher interest rates discourage individuals and companies from borrowing and slow the level of economic activity. They also discourage hiring and tend to increase the unemployment rate. The unemployment rate is about 4.2%, up from a historical low of 3.4% in January of 2023.