The Federal Reserve approved a second consecutive interest rate cut on Thursday. The pace of interest rate cuts was slower than before, but it continued to work hard to adjust the scale of monetary policy.
The Federal Open Market Committee cut its benchmark overnight borrowing rate by a quarter of a percentage point, or 25 basis points, to a target range of 4.50%-4.75%, following a sharp half-percentage cut in September. This rate determines what banks charge for overnight loans, but often affects consumer debt instruments such as mortgages, credit cards and car loans.
The move was widely expected, with the message conveyed at the September meeting and in subsequent comments from policymakers since. The vote was unanimous, unlike the last time Fed governors voted against it for the first time since 2005.
The post-meeting statement reflected some adjustments to the Fed’s view on the economy. These include changes in views on how to assess efforts to lower inflation while supporting the labor market.
The document states that “the committee views risks to achieving its employment and inflation objectives as broadly balanced,” a change related to the “increased confidence” noted in September last year.
Fed officials have justified an accommodative policy model because they believe supporting employment is at least as important as curbing inflation.
Regarding the labor market, the statement pointed out that “the situation has generally eased, and the unemployment rate has increased, but it is still at a low level.” The committee again said the economy “continues to expand at a solid pace.”
Officials have largely described the policy changes as an attempt to bring the interest rate structure in line with an economy with inflation falling back to the central bank’s 2% target, while the labor market has shown some signs of weakness. Federal Reserve Chairman Jerome Powell has said he wants to “recalibrate” policy so that it no longer needs to be as restrictive as it was when the central bank focused almost exclusively on curbing inflation.
Powell will answer questions about the decision at a news conference at 2:30 p.m. ET. The November meeting was postponed by one day because of the U.S. presidential election.
As macroeconomic growth continues to be solid and inflation remains a suffocating problem for American households, there is uncertainty over the extent to which the Fed will need to cut interest rates.
Gross domestic product grew by 2.8% in the third quarter, which was lower than expected and slightly lower than the second quarter, but still higher than the historical trend of about 1.8%-2% in the United States. Preliminary tracking for the fourth quarter points to growth of about 2.4%, according to the Atlanta Federal Reserve.
Overall, the labor market is performing well. However, nonfarm payrolls rose by just 12,000 in October, although the weakness was partly due to storms and labor strikes in the Southeast.
The decision comes against a changing political backdrop.
President-elect Donald Trump scored a stunning victory in Tuesday’s election. Economists widely expect his policies to pose an inflation challenge as he explicitly targets punitive tariffs and mass deportations of undocumented immigrants. However, during his first term, inflation remained low and economic growth remained strong beyond the initial stages of the COVID-19 pandemic.
Still, Trump was fiercely critical of Powell and his colleagues during his first inauguration, with the chairman’s term set to expire in early 2026. The dynamics may become an open question for future policy.
An acceleration in economic activity under Trump could convince the Fed to cut interest rates less, depending on how inflation responds.
People are beginning to question what the Fed’s “end point” is, or when it will decide that it has cut enough interest rates to neither boost nor suppress economic growth. Traders expect the Fed may approve another quarter-point rate cut in December before pausing in January to assess the impact of tightening measures, according to CME Group’s FedWatch tool.
The Federal Open Market Committee (FOMC) said in September that members expected to cut interest rates by an additional half percentage point by the end of this year and then by a full percentage point in 2025.
A “dot plot” of individual officials’ expectations in September showed a final rate of 2.9%, which would mean another half-percentage point cut in 2026.
Even if the Fed cuts interest rates, the market has not reacted in the same way.
U.S. Treasury yields and mortgage rates have both risen sharply since the September rate cut. For example, 30-year mortgages rose about 0.7 percentage points to 6.8%, according to Freddie Mac. The 10-year Treasury yield rose almost as much.
The Fed is seeking to achieve a “soft landing” for the economy, reducing inflation without triggering a recession. The Fed’s most recent preferred inflation measure showed 12-month inflation at 2.1%, while the so-called core inflation measure, which excludes food and energy and is generally considered a better long-term indicator, was at 2.7%.
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