It has been a full two and one-half years since the Federal Reserve started raising interest rates in reaction to the post-pandemic inflation surge. While many expected inflation to react immediately to the Fed’s medicine, the period of higher rates became very drawn out as inflation showed its stubbornness. Thus, the use of the phrase “higher for longer” became prevalent. Factors such as a red-hot labor market and a resilient economy kept feeding the fire.

Inflation has slowly come down over time. Annual inflation rates have moved under 3.0% — much closer to the Fed’s goal of 2.0%. Thus, it should be no surprise that the Fed moved to lower their Federal Funds rate at their meeting last week. The only question seemed to be whether the decrease would be 0.25% or a larger 0.5% decrease. Most market analysts were predicting 0.25%, but as the date came closer and the data continued to favor this Fed action, there were more calls for the larger drop.

That question has been answered with the Fed announcing a 0.5% decrease last Wednesday. Since the markets had anticipated this move, there was also no surprise reaction in the markets. As we have pointed out previously, long-term rates such as mortgages had already moved down substantially in expectation of the action. Therefore, the markets were hanging more on the Fed’s statement released after the meeting. The statement shed some light on how quickly they might act again as they monitor economic conditions. The next Fed meeting is in early November, right after the election—and certainly another decrease could be in the cards. Time for more speculation to begin.