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Essentials of Monetary Policy

Federal Reserve: A More Cautious 25bps Rate Cut

November 7, 2024
Francis Généreux
Principal Economist

According to the Federal Reserve (Fed)

  • The Committee decided to lower the target range for the federal funds rate by ¼ percentage point to 4.50% to 4.75%.
  • Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2% objective but remains somewhat elevated.
  • The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.
  • In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2% objective.

Comments

As expected, the Fed extended the monetary easing cycle it kicked off in September, cutting interest rates by 25 basis points—a move called by the vast majority (84/96) of the forecasters surveyed by Bloomberg.

 

It made just a couple of changes to the press release compared to September’s statement, including a bit more detail about the labour market slowdown. It also dropped the language about the committee having greater confidence that inflation is moving sustainably toward the 2% target. This could just reflect the fact that as inflation nears its target, Powell and company are focusing on the two parts of their dual inflation/employment mandate in a more balanced way. Powell said the omission shouldn’t really be taken as forward guidance.

 

Of course, the Fed probably hasn’t yet factored in the economic and inflationary implications of a second Trump term. If Trump is able to pass his whole agenda, including new tax cuts, high tariffs and lower immigration, it could fuel inflation down the line. We might get a glimpse of the Fed’s thinking about this in its December projections. But until Trump makes official policy announcements, the Fed is unlikely to shift its monetary policy in any way that would show up in its projections. During today’s press conference, Powell said, “the election will have no effects on our policy decisions” and “we don’t guess, we don’t speculate and we don’t assume” when it comes to the consequences of future policy decisions.

 

In the meantime, he reiterated that “we are not on any preset course. We will continue to make our decisions meeting by meeting.” That said, aside from the recent jobs numbers, which were affected by two hurricanes and a strike, the Fed is encouraged by the strong economic indicators. At the same time, Powell said that monetary policy remains restrictive. So even though growth is solid and there’s no real rush to get back to the neutral rate, we can expect more rate cuts to come.

Implications

While the election may have added uncertainty to the outlook, it shouldn’t really change things for the Fed in the immediate term, at least until the new Trump administration announces measures that could affect the economy and the inflation rate. In the meantime, we expect more 25-basis-point rate cuts at upcoming meetings. But the pace of monetary easing should slow in 2025, especially if policies are announced that could fuel inflation.

2024 Schedule of Central Bank Meetings


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