US Fed makes first cut since 2020; rate may reach 4.25-4.50% in Dec

HOUSTON (ICIS)–The Federal Reserve lowered its benchmark interest rate by a half point to 4.75-5.00% on Wednesday, and the central bank could lower it by an additional half point by the end of the year.

The following table summarizes the current and past forecasts for rates, inflation and GDP by members of the Federal Reserve.

	2024	2025	2026
Fed funds	4.4%	3.4%	2.9%
June forecast	5.1%	4.1%	3.1%
GDP	2.0%	2.0%	2.0%
June forecast	2.1%	2.0%	2.0%
Core PCE Inflation	2.6%	2.2%	2.0%
June forecast	2.8%	2.3%	2.0%

Source: Fed

If the forecasts hold true, the US economy will achieve a soft landing, with inflation falling to the Fed’s long-term goal of 2% without triggering a recession.

FED NOTES WEAKER JOB MARKET, INFLATION
The Fed said that the job market had slowed since the last time it voted on rates at the end of July. Inflation has moved closer to the Fed’s goal but remains somewhat elevated.

Unlike its previous statement in July, the Fed said it “has gained greater confidence that inflation is moving sustainably toward 2%”.

In addition, the Fed stressed its commitment to support maximum employment. Its last statement in July lacked such a statement.

CHEMS WILL WAIT BEFORE RATES TRIGGER RECOVERY IN DURABLES
Chemical producers will have to wait before lower rates cause a recovery for demand in durable goods and housing. Both are key end markets for polymers such as polypropylene (PP), nylon, acrylonitrile butadiene styrene (ABS) as well as chemicals used to make polyurethanes, such as isocyanates, polyols and propylene oxide (PO).

Huntsman said the lag is typically about two quarters.

Ultimately, mortgage rates will need to approach 5% before markets for homes and durable goods can recover, according to Dow.

Higher rates had made housing and durable goods like furniture and appliances less affordable. Because fewer consumers are buying homes and moving, they are purchasing fewer durable goods.

LOWER RATES TEND TO BOOST OIL, CHEM PRICES
Typically, prices for oil and other dollar-denominated commodities tend to rise as US interest rates fall.

A rise in oil prices typically causes those for petrochemicals to increase.

Margins for US-based producers benefit from higher oil prices because their plants predominantly rely on gas-based feedstock. By contrast, much of the world relies on oil-based naphtha, giving US producers a cost advantage.

FIRST CUT IN MORE THAN FOUR YEARS
The last time the Federal Reserve lowered interest rates was in March 2020, during the COVID-19 pandemic.

Lockdowns, government stimulus and recovery caused a surge in inflation, which led the Federal Reserve to begin raising the benchmark rate two years later in what became the most aggressive tightening campaign in more than 40 years.

The Fed stopped raising the rate in July 2023.

A year later, inflation started showing signs of approaching the Fed’s target of 2%. At the same time, the labor market began cooling off and returning to more normal levels.

Focus article by Al Greenwood

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