The FOMC cut the Federal Funds rate by 0.25% overnight but provided little new information on the outlook, other than saying that some of the downside risks to economic growth had diminished.
This morning, the Federal Reserve cut the Fed Funds policy rate by a quarter point to 4.50% - 4.75% range and continued to reduce the Treasuries and mortgage-backed securities held on its balance sheet (quantitative tightening).
Chair Powell said, "The economy is strong overall and has made significant progress toward our goals over the past two years. The labor market has cooled from its formerly overheated state and remains solid. Inflation has eased substantially from a peak of 7 percent to 2.1 percent as of September. [...] Overall, inflation has moved much closer to our 2 percent longer-run goal, but core inflation remains somewhat elevated. Longer-term inflation expectations appear to remain well anchored".
"Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than just before the pandemic in 2019. The labor market is not a source of significant inflationary pressures."
"We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent".
"Today, the FOMC decided to take another step in reducing the degree of policy restraint by lowering our policy interest rate by 1/4 percentage point. [...] This further recalibration of our policy stance will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we move toward a more neutral stance over time". [emphasis added]
"We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment. 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. We are not on any preset course. We will continue to make our decisions meeting by meeting." [emphasis added]
In a prepared response to questions, he said, "In the near term the election will have no effects on our policy decisions. [...] We don't know what the timing and substance of any policy changes will be. We therefore don't know what the effects on the economy would be [...] We don't guess, we don't speculate and we don't assume". He added that policy changes would be factored into Fed models over time.
Chair Powell said that the recent run-up in bond yields was not yet sustained enough to represent a notable tightening in financial conditions. He characterised the recent data as "stronger", citing labour force data and retail sales, and "Some of the downside risks to economic activity having been diminished". On inflation, he commented that recent inflation figures were "not terrible, but a little higher than expected".
On future policy decisions he said, "By December we'll have more data, I guess one employment report and two inflation reports, and lots of other data, and we'll make a decision as we get to December".
If invited to resign by President Trump, he said that he would not and that the president does not have the power to fire him or demote his colleagues.
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In saying that downside risks have diminished, Chair Powell was alluding to the jump to 4.3% July unemployment, released in early August, that prompted the 0.50% cut. With unemployment falling and holding at 4.1% for the last two months, he clearly felt some relief that the economy does not appear to be slipping rapidly into recession. This implies that interest rate cuts could be more gradual in 2025, and that is consistent with current pricing of between three and four cuts by the end of 2025.
However, this week's election result implies a high degree of dissatisfaction with the economy that is more consistent with our view that recent data has been distorted to reflect an overly positive outlook. As the revisions and adjustments are made, we are confident that a weaker current picture will emerge.
Nevertheless, the election result also suggests a short-term boost in optimism and economic sentiment. It's difficult to judge whether this will be enough to reverse the slowing momentum.
Longer-term, we are sceptical that the Republican policy program will provide significant relief to enough lower and middle-income households, with tariffs potentially reducing purchasing power and demand.
Moreover, deficit concerns and higher bond yields are negatively impacting the housing market (acknowledged by Chair Powell) which still poses a significant risk to employment in the meantime.
Source: Bloomberg
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