The Federal Reserve reduced interest rates by 25 basis points on Thursday, reflecting progress in controlling inflation and a cooling labor market. This move by the Federal Open Market Committee (FOMC) sets the benchmark rate in a range of 4.50% to 4.75%.
This rate adjustment represents a shift from the larger, 50 basis point cut that initiated the easing cycle in September. According to RBC, a smaller cut was necessary due to resilient economic conditions and persistent inflation, which prevented another larger rate reduction.
The rate cut, the second this year, came after a weaker than expected jobs report for October, released on November 1, which tempered concerns about a potential pause in rate cuts. Fed Chair Jerome Powell noted that “labor market conditions are now less tight than just before the pandemic in 2019,” suggesting the labor market isn’t a significant source of inflationary pressure.
The Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) index, held steady at 2.7% in September, slightly above expectations of 2.6%.
Amidst this monetary policy shift, the Fed also acknowledged the recent election of Donald Trump, with Powell stating that near term policy decisions wouldn’t be impacted by the political transition. However, Trump’s proposed policies such as possible tariffs, tax changes, and immigration restrictions could introduce inflationary pressure, potentially slowing future rate cuts.
Oxford Economics suggested that policy uncertainty from a new administration may prompt the Fed to approach normalization cautiously, delaying a return to a neutral rate.
Market expectations now include two additional 25 basis point rate cuts in the first half of 2025, potentially bringing the rate down to a range of 3.75%-4%. Bank of America’s economist Aditya Bhave expressed confidence in another 25 basis point reduction in December, aligning with Powell’s hints toward continued easing.
