WASHINGTON – The Federal Reserve on Thursday approved a second consecutive interest rate cut, continuing its efforts to straighten monetary policy, albeit at a less aggressive pace than before.
Following a significant 0.5 percentage point cut in September, the Federal Open Market Committee lowered its benchmark overnight borrowing rate by a quarter of a percentage point (25 basis points) to a target range of 4.50%-4.75%. This rate sets the amount banks charge each other for overnight loans, but often affects consumer debt products such as mortgages, credit cards, and auto loans.
Markets had widely expected this move, and it was telegraphed at the September meeting and in follow-up comments from policymakers since then. The vote was unanimous, unlike the previous move, which saw a “no” vote by Fed directors for the first time since 2005. This time, Chancellor Michelle Bowman agreed with the decision.
Stocks closed on a positive note after the meeting, with the tech-heavy Nasdaq up 1.5% to lead the major averages. Both the Nasdaq and S&P 500 closed at record highs. U.S. Treasury yields fell sharply after rising sharply the previous day.
The post-meeting statement reflected some adjustments to the Fed’s view of the economy. Among them were changes in views on how to evaluate efforts to control inflation while supporting the labor market.
“The Committee assesses that the risks to achieving the employment and inflation targets are approximately balanced,” the document said, adding that since September it has expressed “increased confidence” in the process. This has been changed.
Policy readjustment
Fed officials believe that supporting jobs will be at least as much of a priority as controlling inflation, justifying their mode of policy easing.
The statement downgraded the labor market situation slightly, saying: “The situation is generally easing and the unemployment rate, although rising, remains at a low level.” The committee reiterated that the economy “continues to expand at a solid pace.”
Officials primarily made the policy change in an attempt to bring the interest rate structure back in line with economic conditions, where inflation is returning to the central bank’s 2% target while the labor market is showing some signs of softening. It is structured as a framework. Federal Reserve Chairman Jerome Powell has talked about “recalibrating” policy to a level where the central bank no longer needs the restrictive policies it used to when it was mostly focused on controlling inflation.
“Further recalibration of policy stance will help maintain the strength of the economy and labor market and continue to allow further progress in inflation as we move toward a more neutral stance,” Powell said in a post-meeting press conference. Deaf,” he said.
There is uncertainty about how far the Fed will need to cut interest rates, as macroeconomic growth continues to be strong and inflation remains a stifling problem for U.S. households.
Gross domestic product (GDP) grew at a pace of 2.8% in the third quarter, weaker than expected and slightly below second-quarter levels, but still about 1.8% below the U.S. historical trend. -More than 2%. Preliminary tracking for the fourth quarter is expected to be around 2.4% growth, according to the Atlanta Fed.
Overall, the labor market is performing well. However, nonfarm payrolls rose by just 12,000 in October, due in part to severe storms in the Southeast and worker strikes.
This decision was taken in a changing political context.
President-elect Donald Trump won a surprising victory in Tuesday’s election. Economists expect his policies to pose challenges to inflation, primarily because of his stated intention to impose punitive tariffs and mass deportations of illegal immigrants. However, during his first term, economic growth remained strong and inflation remained low, with the exception of the early stages of the COVID-19 pandemic.
Still, Trump has been fiercely critical of Powell and his colleagues during his first term in office, and his term as chairman expires in early 2026. Central bankers studiously avoid commenting on political issues, but Trump’s power dynamics could tip the scales. Regarding future policies.
If economic activity picks up under the Trump administration, the Fed could be persuaded to cut rates less, depending on how inflation responds.
Chairman Powell said the new administration does not intend to factor it directly into monetary policy.
“In the short term, the election will have no impact on policy decisions,” Powell said. The November meeting was pushed back one day because of the election.
Powell also said he has no intention of resigning even if the next president asks him to do so. He ended his press conference a little shorter than usual as he was asked a series of questions about the next government.
Future pace of reduction
Questions have arisen about the “terminal” point for the Fed, or the point at which it decides it has cut rates enough and sets a base rate that neither boosts nor stifles growth. Traders expect the Fed will likely approve another quarter-point rate cut in December and pause in January as it assesses the impact of tightening measures, according to CME Group’s FedWatch tool. I am doing it.
“The overall statement is solid for now as policymakers take time to digest the new Trump shock in economic policy, fiscal conditions and animal spirits, making further interest rate cuts in December a good base case. We interpret this as indicating a policy direction,” said Evercore ISI Vice Chairman Krishna Guha.
The FOMC indicated in September that its members expected a 0.5 percentage point cut in interest rates by the end of this year and another 0.5 percentage point cut in 2025. A “dot plot” of each official’s forecasts for September showed the final rate to be 2.9%. This means a further reduction of 0.5 percentage points will take place in 2026.
Even when the Fed lowers interest rates, the market doesn’t react in the same way. Since September’s interest rate cut, government bond yields have risen sharply, as have mortgage rates. For example, 30-year mortgages rose about 0.7 percentage points to 6.8%, according to Freddie Mac. The yield on 10-year government bonds has also risen by about the same level.
The Fed is aiming to achieve a “soft landing” for the economy, where inflation can be suppressed without triggering a recession. The most recent 12-month rate of inflation recommended by the Fed was 2.1%, but the so-called core, which excludes food and energy, is generally considered a better long-term indicator, at 2.7%.
