Key Takeaways:
– The Federal Reserve has made its second consecutive interest rate cut.
– The reduction was by a quarter of a percentage point, placing the rates in a target range of 4.50%-4.75%.
– The aim is to adjust monetary policy to the current state of the economy.
– Following the decision, stocks closed positively, with both the Nasdaq and S&P 500 reaching record highs.
– The Federal Reserve states inflation and employment goals remain balanced.
– The question of how far the Federal Reserve will go with cuts is uncertain due to stable macroeconomy growth.
– The expectation for the economic activity during the Trump administration is that it might result in less rate cuts.
Fed Adopts Less Aggressive Pace for Interest Rate Cuts
In an effort to recalibrate the monetary policy, the Federal Reserve has made its second consecutive quarter percentage point cut. Lending rates between banks dropped to a target range of 4.50% to 4.75%. As these rates often influence consumer loans including credit cards, auto loans, and mortgages, this move can impact consumers at large.
Market Response to Fed’s Decision
After the decision was disclosed, the stock market ended the day on a positive note. The tech-driven Nasdaq rallied by 1.5% and alongside the S&P 500, registered record closing highs. Notably, the vote for cut rates was unanimous, establishing consensus within the Reserve, in contrast to the previous vote which saw a ‘no’ vote.
Fed’s Take on Economic Conditions
The post-decision statement offered some glimpses into the Federal Reserve’s perspective on the current economy. A shift was noted in how they viewed efforts to manage inflation while supporting the labor market. The statement noted that risks in achieving employment and inflation goals were balanced.
The Fed’s Outlook on Market Conditions
The outlook contains a slight downgrade of the labor market, stating that conditions have generally eased and unemployment has marginally increased but remains low. In terms of the economy, the committee communicated that it continues to expand at a consistent pace.
Purpose of Recalibrating Policy
The move is justified by Federal Reserve officials as a strategy to support employment, believing that it is becoming as much of a priority as controlling inflation. Fed Chair, Jerome Powell, maintains that the overall goal of “recalibrating” policy is to create a balance where monetary policy doesn’t need to be as restrictive as before, especially with inflation drifting back to the central bank’s 2% target.
Future Predictions Amid Political Changes
As President-elect Donald Trump takes office, it is believed that his policies may affect inflation. However, Powell declares that the presidential election will not directly affect monetary policy. The Fed plans to continue monitoring market responses before deciding on future cuts. Market traders predict another quarter point cut in December.
The Impact of the Cut
Questions have risen regarding how far the Federal Reserve will proceed with interest rate cuts. This uncertainty exists due to the current solid growth in the macro economy and the continuously stifling problem of inflation for households. Even with lowered rates, the Treasury yields and mortgage rates have surged since the last cut, indicating that markets aren’t responding as anticipated.
However, through this rate cut, the Federal Reserve is striving to achieve a ‘soft landing’ for the economy without causing a recession. Their preferred inflation indicator most recently showed a 2.1% 12-month rate, indicating a slight uptick. The endgame for the Fed is to contain inflation without triggering an economic downturn. As such, future cuts and policy changes will depend largely on fluctuating market conditions.