The Federal Reserve has approved a second consecutive rate cut, reducing the benchmark overnight lending rate by 25 basis points to a target range of 4.50%-4.75%. Although the reduction is smaller than the previous 50 basis point cut in September, it reflects the ongoing efforts to maintain a moderate monetary policy. The rate influences not only interbank lending but also consumer debt instruments such as mortgages, credit cards, and car loans.
The move was widely anticipated by markets, following signals from the September meeting and subsequent policy statements. Unlike the previous meeting where there were dissenting votes, this decision was unanimous with board member Michelle Bowman in agreement.
The Fed's post-meeting statement indicates a shift in their view on balancing inflation control with labor market support. The committee believes risks to achieving employment and inflation goals are roughly balanced, a change from the previous expression of confidence.
Fed officials maintain that a policy of easing is appropriate, seeing employment support as vital as inflation control. While the labor market has shown some slowdown with a rise in unemployment rates, it remains relatively strong. The economy continues to expand robustly, though third-quarter GDP growth at 2.8% was below expectations and slightly less than the second quarter. The Atlanta Fed predicts around 2.4% growth for the fourth quarter.
Despite a strong labor market, non-farm employment in October saw a modest increase of just 12,000 jobs, partially due to adverse weather and labor strikes in the Southeast.
Recent political developments have added complexity to economic policy-making. President-elect Donald Trump's surprising election victory has led economists to predict potential inflation challenges, owing to his proposed tariffs and immigration policies. However, inflation remained low during his first term, with strong economic growth save for the COVID-19 pandemic's onset.
Trump's tenure involved significant criticism of Fed Chair Jerome Powell, whose term ends in early 2026. While the Fed aims to remain apolitical, Trump's influence may affect future policy decisions. Rapid economic activity under his leadership could sway the Fed to lower rates further, depending on inflation trends.
Questions have arisen about the Fed's endpoint for rate cuts, aiming for a neutral interest rate that neither stimulates nor hinders growth. According to the CME Group's Fed watch tool, traders expect another 25 basis point cut in December, with a possible pause in January to assess the impact of tightening measures. September's FOMC projection indicated further cuts by the end of the year and into 2025, with a target final rate of 2.9% by 2026.
Despite the Fed's rate cuts, market reactions have varied.
