The Fed Cuts Rates Again

Key Takeaways

• As expected, the Federal Reserve’s Federal Open Market Committee (FOMC) at its November meeting cut interest rates by 0.25%. The federal funds target rate range stands at 4.50% to 4.75%.
• The FOMC’s statement contained a new dovish sentence. “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.”
• Fed Chair Jerome Powell said at the post-meeting press conference the growing U.S. deficit and fiscal policy are on an “unsustainable path.”
• Chair Powell also said he would not leave his post if asked to resign by President-elect Donald Trump.

At their November meeting, Federal Open Market Committee (FOMC) members unanimously agreed to a 25-basis-point cut in the fed funds rate range to 4.50% to 4.75%, the second lowering of rates this year. The cut surprised few; nearly 100% of the market expected interest rates at the meeting to be lowered by 25 basis points. For the FOMC’s December meeting, the majority of the market, as well as the Fed, expects another 25-basis-point cut. The Fed’s latest projections, released in September, had the fed funds rate lowering to a range of 3.25% to 3.50% in 2025 and 2.75% to 3.00% by 2026.

The FOMC’s November statement added two dovish sentences, indicating the Fed is hopeful for a soft landing for the economy. First, “[t]he Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.” And second, “[s]ince earlier in the year, labor market conditions have generally eased.”

However, the FOMC continued to underscore it will be data dependent when deciding whether to cut rates further.

“If the economy remains strong and inflation is not sustainably moving toward 2%, we can dial back policy restraint more slowly,” Fed Chair Jerome Powell said at a post-meeting press conference. “If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can move more quickly.”

“Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate,” he added.

What the Fed’s statement didn’t mention was anything about this week’s presidential election.

“In the near term, the election will have no effects on our policy decisions,” Chair Powell said. “We don’t guess, we don’t speculate, and we don’t assume.”

However, he also said he would not resign if asked to by President-elect Trump, a frequent critic, since being removed as Fed chair in this case was “not permitted by law.”

Chair Powell did underscore the economic danger of the rising U.S. deficit.

“The federal government’s fiscal path, fiscal policy, is on an unsustainable path,” he said. “… And we see that in a very large deficit, you’re at full employment [and] that’s expected to continue, so it’s important that be dealt with. It is ultimately a threat to the economy.”

After the Fed announcement, the 10-year Treasury ended the day higher and finished at 4.31%; short and long rates were also higher. The Dow Jones Industrial Average and S&P 500 Index returned -0.25% and -0.29%, respectively, for the day.

10-Year Treasury Yield over the Past 12 Months

In Conclusion

The seventh FOMC meeting of the year didn’t produce many surprises. The market got what it expected: a 25-basis-point cut. The Fed’s accompanying statement reflected a growing, if cautious, confidence that the economy—especially with inflation moderating and labor-market conditions easing—can be brought in for a soft landing. And of course, the Fed gave its now-familiar caution that future moves will be dependent on economic data. So now, all eyes turn to the FOMC’s December meeting, when another 25-basis-point cut is expected. But with a new president elect and other macro-economic variables at play, a lot can happen between now and mid-December to affect the timing and size of the Fed’s next rate cut.

Definitions

One basis point is equal to 0.01%.

The federal funds rate is the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one another overnight.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

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