The Federal Reserve approved its second consecutive interest rate cut on Thursday, moving at a less aggressive pace than before but continuing its efforts to get monetary policy right.
Following September’s big half-percentage point cut, the Federal Open Market Committee cut its benchmark overnight lending 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 lending, but it often affects consumer debt instruments such as mortgages, credit cards and car loans.
Markets had widely expected the move, which was telegraphed both at the September meeting and in subsequent remarks from policymakers since then. The vote was unanimous, unlike the previous move that saw the first “no” vote by a Fed governor since 2005. This time, Governor Michelle Bowman went ahead with the decision.
The statement after the meeting reflected some changes in the way the Fed views the economy. Among them was a changed view on how it evaluates efforts to reduce inflation while supporting the labor market.
“The committee judges that the risks to achieving its employment and inflation targets are roughly in balance,” the document said, a change from September when it noted “greater confidence” in the process.
Fed officials have justified the mode of policy easing as they see supporting employment becoming at least as much a priority as stopping inflation.
On the labor market, the statement said “conditions have generally eased and the unemployment rate has increased but remains low.” The committee again said the economy “has continued to expand at a solid pace.”
Officials have largely framed the policy change as an effort to bring the rate structure back in line with an economy where inflation is returning to the central bank’s 2% target, while the labor market has shown some signs of easing. Fed Chairman Jerome Powell has talked about “recalibrating” policy back to where it should no longer be as restrictive as it was when the central bank focused almost exclusively on taming inflation.
Powell will answer questions about the decision at his press conference at 2:30 PM ET. The November meeting was postponed a day due to the US presidential election.
There is uncertainty about how far the Fed will have to go with cuts as the macro economy continues to post solid growth and inflation remains a suffocating problem for American households.
Gross Domestic Product grew at a 2.8% pace in the third quarter, less than expected and slightly below the second quarter level, but still above the historical trend for the US of around 1.8%-2%. Preliminary tracking for the fourth quarter is showing growth around 2.4%, according to the Atlanta Fed.
Overall, the labor market has held up well. However, nonfarm payrolls rose by just 12,000 in October, though the weakness was partly attributed to storms in the Southeast and labor strikes.
The decision comes amid a changing political backdrop.
President-elect Donald Trump scored a stunning victory in Tuesday’s election. Economists mainly expect his policies to pose challenges to inflation, with his stated intentions of punitive tariffs and mass deportations of undocumented immigrants. However, in his first term, inflation remained low, while economic growth, outside the initial phase of the Covid pandemic, remained strong.
However, Trump was a harsh critic of Powell and his colleagues during his first term in office, and the chairman’s term expires in early 2026. Central bankers have steadfastly avoided commenting on policy issues, but Trump’s dynamic could be a surplus for the forward policy course.
A pick-up in economic activity under Trump could persuade the Fed to cut rates less, depending on how inflation reacts.
Questions have been raised about what is the “terminal” point for the Fed, or the point at which it will decide it has cut enough and has its benchmark rate where it is neither pushing nor holding back hikes. Traders expect the Fed is likely to approve another quarter-point rate cut in December and then pause in January as it assesses the impact of its tightening moves, according to CME Group’s FedWatch tool.
The FOMC indicated in September that members expected half a percentage point more in cuts through this year and then another full percentage point in 2025.
September’s “dotted pie chart” of individual officials’ expectations showed a final rate of 2.9%, which would mean another half percentage point of cuts in 2026.
Even with the Fed’s rate cut, markets have not responded in kind.
Treasury yields have risen since the September cut, as have mortgage rates. For example, the 30-year mortgage is up about 0.7 percentage points to 6.8%, according to Freddie Mac. The yield on the 10-year Treasury rose almost as much.
The Fed is seeking to achieve a “soft landing” for the economy in which it can reduce inflation without causing a recession. The Fed’s preferred gauge of inflation recently showed a 12-month rate of 2.1%, although the so-called core, which excludes food and energy and is generally considered a better longer-term indicator, was at 2.7%.