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The Federal Reserve approved its second straight interest rate cut on Thursday, at a less aggressive pace than before but continuing its efforts to correct monetary policy.
Following September’s big half-percentage-point cut, the Federal Open Market Committee lowered its key overnight rate by a quarter of a percentage point, or 25 basis points, to a target range of 4.50%-4.75%. The rate determines what banks charge each other for overnight loans, but often affects consumer debt instruments such as mortgages, credit cards and car loans.
Markets had widely expected this move, which was telegraphed both at the September meeting and in follow-up comments from policymakers since. The vote was unanimous, unlike the previous move that saw a “no” vote from a Fed governor for the first time since 2005. This time, Governor Michelle Bowman agreed to the decision.
The statement after the meeting reflected some adjustments in the way the Fed views the economy. One of these was a change in how the country assesses efforts to reduce inflation while supporting the labor market.
“The Committee considers that the risks to achieving the employment and inflation targets are broadly balanced,” the document said, a change from September, when it noted “greater confidence” in the process.
Recalibration of policy
Fed officials have justified easing policy because they believe supporting employment is at least as much of a priority as combating inflation.
The statement downgraded the labor market somewhat, saying that “conditions have generally eased and the unemployment rate has increased, but remains low.” The commission said again that the economy “has continued to grow at a robust pace.”
Officials have largely interpreted the policy shift as an attempt to realign the interest rate structure with an economy in which inflation is drifting back toward the central bank’s 2% target while the labor market shows some signs of weakening. Fed Chairman Jerome Powell has talked about “recalibrating” policy so that it no longer has to be as restrictive as it was when the central bank focused almost exclusively on curbing inflation.
There is uncertainty about how far the Fed will have to go with cuts as the macroeconomy continues to show solid growth and inflation remains a stifling problem for US households.
Gross domestic product grew 2.8% in the third quarter, less than expected and slightly below the second quarter level, but still above the historical trend for the US, around 1.8%-2%. According to the Atlanta Fed, preliminary figures for the fourth quarter indicate growth of around 2.4%.
In general, the labor market has held up well. However, nonfarm payrolls rose by just 12,000 in October, although the weakness was partly attributed to storms in the Southeast and labor strikes.
The decision comes against a changing political backdrop.
President-elect Donald Trump won a stunning election victory on Tuesday. Economists largely expect his policies to pose a challenge to inflation, with his stated intentions of punitive tariffs and mass deportations for undocumented immigrants. However, during his first term, inflation remained low while economic growth, outside the initial phase of the Covid pandemic, remained strong.
Yet Trump was a fierce critic of Powell and his colleagues during his first term as president, and the chairman’s term expires in early 2026. Central bankers studiously avoid commenting on political matters, but Trump’s momentum could be a cross over for the stock. of the policy before us.
An acceleration in economic activity under Trump could convince the Fed to cut rates less, depending on how inflation responds.
During a news conference Thursday, Powell said the new administration will not directly consider monetary policy.
“In the short term, the election will have no effect on our policy decisions,” Powell said. The November meeting was pushed back one day due to the elections.
Powell also said he would not resign even if the newly elected president asked for his resignation.
Pace of future cuts
Questions have been raised about what the “end point” is for the Fed, or the point at which it will decide that it has cut enough and has its benchmark rate at which it will neither push nor hold back growth. Traders expect the Fed is likely to approve another quarter-point cut in December and pause in January as it assesses the impact of its tightening measures. CME Group’s FedWatch tool.
“We interpret the statement generally as pointing to an interim stable policy path as policymakers take time to digest the emerging Trump shocks to economic policy, financial conditions and the animal spirit, with a new cut in December is a good base case. ” said Krishna Guha, Vice Chairman of Evercore ISI.
The FOMC indicated in September that members expected half a percentage point more cuts by the end of this year, and then another full percentage point in 2025. The dot plot of individual officials’ expectations in September showed a final rate of 2 .9%. which would imply another half a percentage point of cuts in 2026.
Even when the Fed cut rates, markets haven’t responded in kind. Government bond yields have risen higher since the September cut, as have mortgage rates. The 30-year mortgage, for example, rose by about 0.7 percentage points to 6.8%, according to Freddie Mac. The yield on ten-year government bonds has risen almost as much.
The Fed is aiming for a “soft landing” for the economy, in which it can reduce inflation without causing a recession. The Fed’s preferred inflation indicator recently showed a 12-month yield of 2.1%, although the so-called core, which excludes food and energy and is generally considered a better long-term indicator, stood at 2.7%.