Fed Cuts Rates Again — This Time by 25 Bps — in Effort to Maintain Economic Momentum
The United States Federal Reserve has cut its benchmark lending rate by a quarter percentage point, extending efforts to keep the U.S. economic expansion on solid footing.
Uncertain Economic Outlook
According to a statement released by the Federal Open Market Committee (FOMC), officials voted unanimously to lower the federal funds rate to a range of 4.5 per cent to 4.75 per cent. This adjustment follows a larger, half-point cut in September.
"The committee judges that the risks to achieving its employment and inflation goals are roughly in balance," the FOMC said in a statement. "The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate."
Modifications to Fed Statement
Policymakers no longer included a line about achieving ‘greater confidence’ that inflation is moving sustainably toward two per cent, though they noted inflation has ‘made progress’ toward the central bank’s goal.
The committee modified its language around the job market slightly as well. "Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low," the Fed statement said.
Market Reaction
The S&P 500 index of U.S. stocks remained higher, while Treasuries pared gains and the dollar pared losses. The decision follows the re-election this week of Donald Trump, who has promised to deploy more aggressive tariffs, crack down on immigration, and extend tax cuts.
Those policies could put upward pressure on prices and long-term interest rates and prompt the Fed to scale back rate reductions in the months ahead. Fed officials may also find their decisions under increased scrutiny, given Trump’s history of publicly criticizing Fed chair Jerome Powell.
Chair Powell’s Press Conference
Chair Powell will deliver opening remarks and take questions at a 2:30 p.m. press conference in Washington.
A Measured Approach to Rate Cuts
After beginning the Fed’s easing cycle with an outsize rate adjustment, policymakers have said they favor a more measured and careful approach to rate cuts moving forward.
A Robust Economy
The U.S. economy powered ahead at a 2.8 per cent annual rate in the third quarter, fueled by a pickup in consumer spending. Concerns about imminent labor market weakening have also abated, but data still point to a cooling trend.
U.S. employers added just 12,000 jobs in October — restrained by severe weather and a major strike — and prior months’ figures were revised lower. Inflation has subsided substantially in recent years, yet progress has been choppy.
From a year earlier, the rate of price increases eased to 2.1 per cent in September, landing just above the central bank’s two per cent goal. The Fed’s preferred gauge of underlying inflation, meanwhile, posted its biggest monthly gain since April.
Rate Cuts on the Horizon
Traders saw a quarter-point cut Thursday as a near certainty, and futures markets show a high probability of another similar-sized cut in December. Treasury yields climbed rapidly in the run-up to the election, pushing up mortgage rates in an already chilled housing market.
The S&P 500 climbed to a record high in the wake of Trump’s victory.
Sources:
- Bloomberg.com
- The Federal Open Market Committee (FOMC)
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This article is not intended as investment advice and should not be used as such. Please consult a financial advisor before making any investment decisions.
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