Key Points
Quarter-Point Rate Cut: The Fed lowered its benchmark rate to a target range of 4.50%-4.75%.
Policy Recalibration: Fed Chair Jerome Powell emphasized balancing inflation control with labor market support.
Positive Market Reaction: The Nasdaq and S&P 500 reached record highs post-announcement.
Uncertainty Ahead: Analysts anticipate another rate cut in December, with future cuts dependent on economic conditions.
Fed’s Decision and Economic Outlook
The Federal Open Market Committee (FOMC) reduced its overnight borrowing rate by 25 basis points, setting a new target range of 4.50%-4.75%. The decision aligns with the Fed's strategy of easing monetary policy, influenced by rising employment concerns alongside inflation control. The rate cut was unanimously supported by the committee, signaling a shift toward maintaining economic stability without significant inflationary pressure.
Source: Federal Reserve Bank of New York
Market Reaction and Policy Shift
Stocks responded positively to the Fed’s decision, with the Nasdaq gaining 1.5% and the S&P 500 reaching record highs. Treasury yields fell, adding momentum to the stock market rally. Powell clarified that the policy shift aims to support economic growth by adjusting the Fed’s stance on inflation and employment goals. “This further recalibration of our policy stance will help maintain the strength of the economy and the labor market,” Powell said during the post-meeting press conference.
Balancing Inflation and Employment
In its post-meeting statement, the Fed acknowledged the balanced risks in achieving both employment and inflation targets. Despite ongoing concerns about inflation, recent data shows progress towards the Fed’s 2% target. Employment growth, while slowing, remains strong, with nonfarm payrolls rising by only 12,000 in October due to external factors like labor strikes.
Impact of U.S. Elections
The Fed’s rate cut coincides with the political backdrop of President-elect Donald Trump’s victory. Trump’s policies may bring inflationary challenges, with potential for tariffs and immigration policy changes to impact economic growth. While the Fed steers clear of political influences, the administration’s actions could indirectly affect rate policy and economic conditions.
Future Rate Cuts and Economic Considerations
Analysts expect another quarter-point cut in December, with potential for additional reductions in 2025 and 2026. Powell and other policymakers are cautious, aiming for a “soft landing” where inflation eases without triggering a recession. The Fed’s preferred inflation indicator is currently at 2.1%, but core inflation remains higher at 2.7%.
