Fed cuts interest rates by 0.25% amid economic shifts and inflation concerns

The Federal Reserve on Thursday approved its second consecutive interest rate cut, reducing its benchmark rate by a quarter percentage point (25 basis points) to a target range of 4.50 per cent to 4.75 per cent, according to a detailed report by CNBC.

This move follows September’s larger half-point reduction and marks the Fed’s ongoing effort to fine-tune monetary policy in response to the evolving economic conditions. The decision, made by the Federal Open Market Committee (FOMC), was unanimous, a shift from the September meeting when there was a dissenting vote from Governor Michelle Bowman, the CNBC report explained further.

What is the impact of this rate cut?

The rate cut primarily affects the overnight borrowing rate between banks but also has a ripple effect on consumer borrowing costs, including mortgages, credit cards, and auto loans. The move was widely anticipated, as Fed officials had signaled the possibility of further easing in recent statements. Markets responded positively, with the Nasdaq leading gains, rising 1.5 per cent, and both the Nasdaq and S&P 500 closing at record highs.

Fed’s outlook on the economy

In its post-meeting statement, the Fed showed subtle changes in its outlook on the economy. While the committee acknowledged that inflation is easing, it also tempered its optimism about the labour market.

The statement noted that "conditions have generally eased," with the unemployment rate rising slightly but remaining low. Despite this, the Fed reiterated that the economy continues to grow at a solid pace, and it emphasized that its primary objective remains balancing inflation control with supporting job growth.

Fed Chair Jerome Powell described the rate cut as part of a “recalibration” of policy. He explained that the Fed aims to steer the economy toward a more neutral stance, one where monetary policy neither stimulates nor restrains economic activity too much. Powell stressed that the rate cuts are intended to support continued progress on inflation while maintaining a strong labour market.

There is growing uncertainty over the extent of future rate cuts, as the US economy shows resilience. The third-quarter GDP growth rate came in at 2.8 per cent, slightly below expectations but still robust compared to the historical trend. Job growth has also slowed, with nonfarm payrolls increasing by just 12,000 in October, partly due to weather-related disruptions and ongoing labour strikes.

The Fed’s cautious approach comes amid a changing political climate, with President-elect Donald Trump’s victory in the recent election raising questions about the impact of his policies on inflation and economic growth. While Powell insisted that the election outcome would not influence the Fed’s immediate policy decisions, there is speculation that the Fed may adjust its approach depending on how Trump’s economic agenda affects inflation and overall economic conditions.

Looking ahead, market participants expect that the Fed will likely approve another quarter-point cut in December before pausing to assess the full effects of its actions. The CME Group’s FedWatch tool suggests that the Fed may continue its gradual easing process into 2025, with a target terminal rate around 2.9 per cent. However, despite the Fed’s rate cuts, market interest rates, including mortgage and Treasury yields, have remained relatively high.

Objective of the Federal Reserve

The Fed is aiming for a “soft landing” bringing inflation down to its 2 per cent target without triggering a recession. Recent inflation data shows the Fed’s preferred measure at 2.1 per cent, while the core inflation rate, excluding volatile food and energy prices, stands at 2.7 per cent. The central bank's path forward will depend on balancing these inflation trends with broader economic conditions.