The U.S. Federal Reserve announced another 25 basis point cut to the federal funds rate on December 16, 2024, bringing the target range down to 4.25%–4.50%. This marks the second consecutive rate cut following a similar move in November, as the Fed continues its cautious efforts to support economic growth while maintaining control over inflation.

The decision by the Federal Open Market Committee (FOMC) comes amid evidence that inflation is gradually easing. The core Personal Consumption Expenditures (PCE) inflation rate declined to 2.8% in October from 3.4% the previous year. Likewise, the Consumer Price Index (CPI) for November showed a 2.7% year-over-year increase, with core CPI at 3.3%. These numbers suggest that inflationary pressures, while still above the Fed’s long-term target, are beginning to recede.

Meanwhile, the labor market remains resilient but is showing signs of moderation. Nonfarm payroll growth slowed modestly in October and November, and the national unemployment rate inched up to 4.2% in November. These developments indicate a gradual cooling of labor demand, which aligns with the Fed’s aim to balance price stability without stalling job creation.

The financial markets have reacted cautiously to the Fed’s moves. Bond investors are anticipating a so-called "hawkish cut," suggesting that while the central bank is easing rates, it remains vigilant about inflation risks. As a result, there has been increased demand for shorter-term U.S. Treasury securities, reflecting uncertainty about how quickly or aggressively the Fed may cut rates in the months ahead.

In commodities, gold prices have edged higher in response to the rate cut. Spot gold rose to \$2,650.86 per ounce as investors interpreted the Fed’s decision as a potential sign of a longer-term shift in monetary policy. Precious metals often benefit when interest rates decline, as they become more attractive relative to interest-bearing assets.

The Federal Reserve’s policy moves are also influencing global markets. The Indian rupee, for instance, is facing downward pressure and may fall beyond 85 per U.S. dollar due to the strengthening of the dollar and the Fed’s firm stance. The Reserve Bank of India has been intervening to stabilize the currency in the face of these developments.

Looking forward, the Fed has signaled a continued data-dependent approach. Economic indicators such as inflation, employment levels, and fiscal strategies from the incoming U.S. administration will be key factors in determining the pace and extent of future interest rate changes. Some Federal Reserve officials have suggested that a neutral policy stance—where interest rates neither stimulate nor restrain the economy—could be achieved by late 2025.

Overall, the Federal Reserve’s December 2024 rate cut reflects a strategic and measured response to a complex economic environment. As the Fed works to steer the economy toward sustainable growth and stable prices, both domestic and international markets will be closely monitoring its next moves.