The Federal Reserve, aiming to recalibrate its monetary policy, approved a quarter-point rate cut on Thursday, marking its second consecutive rate reduction. This shift is less aggressive than the previous move but signals continued efforts to adapt to economic conditions.
Following a more significant half-percentage point cut in September, the Federal Open Market Committee (FOMC) adjusted its overnight borrowing rate by 25 basis points to a target range of 4.50%-4.75%. This key rate, influencing consumer interest rates on mortgages, credit cards, and loans, determines what banks charge each other for overnight lending.
The decision, widely anticipated by the markets, followed hints from the FOMC’s September meeting and recent statements by Fed policymakers. This time, the committee’s vote was unanimous, with Governor Michelle Bowman, who had previously dissented, aligning with the quarter-point rate cut decision.
Stock markets responded positively, with the Nasdaq, led by tech stocks, rallying 1.5% to close at a record high. The S&P 500 also reached record levels, and Treasury yields fell sharply after a brief surge the day prior.
Subtle Adjustments in Economic Outlook
The Fed’s post-meeting statement reflects a nuanced shift in its approach to balancing inflation control with support for the labor market. The statement notes that risks to employment and inflation goals are now roughly in balance, adjusting from September’s view, which expressed greater confidence in the process.
Fed officials have increasingly emphasized employment as a central concern, aligning it alongside inflation as a key priority in monetary policy. The statement slightly downgraded its view of the labor market, noting that conditions have generally eased, and the unemployment rate has moved up but remains low. Yet, the committee acknowledged that economic expansion remains solid.
Fed Chair Jerome Powell has referred to these adjustments as a recalibration of policy, reducing the need for the previously restrictive approach when inflation control was the primary focus. Powell explained that the Fed’s current policy stance aims to sustain economic and labor market strength while promoting continued progress toward inflation targets.
Considering Future Rate Adjustments
There remains uncertainty regarding the extent of future quarter-point rate cuts, as the economy shows resilience, though inflation remains a concern for U.S. households. GDP growth reached 2.8% in the third quarter, slightly below the second-quarter rate but still above the U.S. trend of 1.8%-2%. Projections for the fourth quarter anticipate growth near 2.4%.
While the labor market remains robust, nonfarm payrolls increased by only 12,000 in October, with the slowdown partly attributed to severe weather in the Southeast and labor strikes.
Changing Political Landscape
The Fed’s decision occurs in the context of shifting political dynamics. President-elect Donald Trump recently secured victory, and his policies are expected to bring new challenges for inflation control, especially with proposed tariffs and immigration policies. In his prior term, Trump openly criticized Powell for not cutting rates more aggressively. As Powell’s term continues until 2026, the Fed remains committed to its independence, steering clear of political influence.
Powell noted that the new administration would not impact the Fed’s policy decisions, adding that the election would have no bearing on immediate policy. Powell also reaffirmed his commitment to his role, stating that he would not step down even if the president-elect requested it. He concluded the press conference earlier than usual, as questions centered on the upcoming administration.
Looking Ahead at Rate Decisions
Debate continues on the Fed’s terminal point for quarter-point rate cuts—the level at which its policy neither restricts nor stimulates growth. Current market expectations suggest another quarter-point cut in December, potentially followed by a pause in January, as the Fed assesses the impact of recent moves.
Economists interpret the Fed’s actions as indicative of a cautious, steady approach as it navigates the potential economic shifts under the new administration. In September, Fed officials anticipated a half-percentage point reduction by year’s end and an additional full percentage point in 2025, targeting a terminal rate of 2.9% in 2026.
Despite quarter-point rate cut, market rates have moved differently. Treasury yields and mortgage rates have risen since September, with the 30-year mortgage rate reaching 6.8% and the 10-year Treasury yield climbing similarly.
The Fed’s goal remains a soft landing for the economy, aiming to reduce inflation without triggering a recession. The latest inflation data indicated a 2.1% 12-month rate, though the core inflation metric, which excludes volatile food and energy prices, stood at 2.7%. As the Fed fine-tunes its strategy, it continues its focus on supporting economic stability amid complex economic and political challenges.
