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In light of a job market that has “generally eased” and inflation that is still approaching the U.S. central bank’s 2% target, the Federal Reserve lowered interest rates by a quarter of a percentage point on Thursday.
At the conclusion of a two-day policy meeting, the Federal Open Market Committee, which sets interest rates, stated that “economic activity has continued to expand at a solid pace.” As anticipated, officials lowered the benchmark overnight interest rate to the 4.50%–4.75% range. Everyone agreed on the decision.
However, the Fed’s new policy statement made a broader reference to the labour market, whereas its previous one mentioned slowing monthly job gains.
“Labour market conditions have generally eased,” the statement said, despite the low unemployment rate.
Inflation and job market risks were “roughly in balance,” the Fed stated, echoing an announcement made following its September meeting.
A key indicator of inflation, the personal consumption expenditures price index excluding food and energy items, has not changed much over the past three months, running at an annual rate of about 2.6% as of September. Additionally, the reference to inflation was slightly altered in the new statement, which now reads that price pressures have “made progress” towards the Fed’s objective rather than “made further progress.”
Following the policy statement’s release, the yield curve flattened and Treasury yields reduced losses. The dollar marginally reduced losses but was still down for the day, while U.S. stock markets held onto their gains. The Fed’s final policy meeting of the year is next month, and futures markets priced in another quarter-percentage-point rate cut.
“The changes to the inflation language make this statement somewhat lessdovish than the last one, and it looks like the Fed is cracking open the door to a December pause,” stated Omair Sharif, president of Inflation Insights.
The resurgence of Republican President-elect Donald Trump in January will also be taken into consideration when interpreting the new statement.
Trump ran on a platform of harsh import tariffs and a crackdown on immigration, which could have a wide-ranging and unpredictable effect on the economic environment the Fed will traverse in the upcoming months as officials work to keep inflation under control and near the central bank’s target. Trump defeated Democratic Vice President Kamala Harris in Tuesday’s presidential election.
During the Republican leader’s first term in office, Trump appointed Fed Chair Jerome Powell to head the central bank. In 2018 and 2019, Powell and Trump disagreed over rate policy.
After Trump won the election, investors already reduced their own betting that the Fed would be able to lower interest rates as much as anticipated.