Federal Reserve has lowered the key overnight interest rate by 0.25% to a range of 4.50%-4.75%. The Fed says the economic outlook is uncertain and they are paying attention to risks on both sides of their goals for employment and inflation.
The Fed believes the risks to both employment and inflation goals are “about balanced.” They also note that inflation has made progress toward the 2% target, but it is still somewhat high.
The labor market has “generally eased,” with the unemployment rate rising slightly but still remaining low. Economic activity continues to grow at a steady pace.
The Fed plans to keep reducing its bond holdings at the same rate as before. All members of the committee voted in favor of this policy.
US Treasury yields trimmed their losses following the Federal Reserve’s decision to cut rates. The 10-year yield decreased by 6.7 basis points, settling at 4.358%.
Similarly, the two-year US Treasury yield reduced its losses after the rate cut, down by 4.2 basis points to 4.226%.
The yield curve between the two-year and ten-year US Treasuries flattened slightly to 12.8 basis points, compared to 13.4 basis points just before the Fed’s decision.
The US dollar slightly pared its losses after the Fed cut rates by 25 basis points. The index stood at 104.56, reflecting a 0.52% decline on the day.
US rate futures anticipate an additional 67 basis points of rate cuts in 2025, according to LSEG data.
Fed Chair Powell began his news conference, highlighting that the economy remains strong, with a solid labor market and inflation easing significantly.
He emphasized the Fed’s commitment to maintaining economic strength and reducing policy restraint.
Powell expressed confidence that inflation will sustainably decline to 2% with a recalibrated stance.
He noted that the unemployment rate has decreased in the past three months, wage growth has eased, and labor market conditions are less tight than pre-pandemic, with no inflationary pressures coming from the labor market.
Fed Chair Powell noted that overall inflation is much closer to the goal, but core inflation remains elevated. He emphasized that policy decisions are guided by the dual mandate, and the risks to achieving goals are roughly balanced.
He mentioned that the Fed lowered rates today as part of a further recalibration of its policy stance, aiming to gradually move toward a neutral position over time. Powell stressed that the Fed is not on a preset course and makes decisions meeting by meeting, adjusting policy as needed to promote its goals.
Powell indicated that if the economy remains strong and inflation doesn’t reach 2%, the Fed may slow down the adjustment of policy. He stated that the current policy stance is well-positioned relative to the risks.
In the near term, Powell said the election will have no impact on policy decisions, and the economy is difficult to forecast. He also mentioned that the timing and substance of future policy changes are uncertain and that the Fed does not guess or speculate on these matters.
Powell stated that in the near term, the election will not affect the Fed’s policy decisions, as the economy is difficult to forecast. He emphasized that the timing and substance of any policy changes are uncertain, and the Fed does not engage in guessing or speculation.
He acknowledged that policies from any administration or Congress could have an impact, but such effects will be considered among other factors.
Regarding US Treasury yields, Powell noted that while bond rates have increased, they are not reflecting higher inflation expectations but rather growth expectations. He added that bond rates are not yet a key consideration for Fed policy.
Since the September meeting, Powell observed stronger-than-expected economic activity, with risks to the economy diminishing. He feels optimistic about economic conditions, noting that the job report was better than anticipated. The Fed will make a decision on rates in December based on upcoming data.
Powell stated that the Fed will review incoming data in December to assess its impact on the outlook, as they recalibrate from a restrictive policy level. They are trying to find a balance between acting too quickly or too slowly, aiming for a neutral stance.
He clarified that the change in the statement, which omitted confidence, was not meant to imply inflation’s persistence. The Fed is confident that inflation is moving towards 2%, but they prefer not to offer too much forward guidance due to uncertainty.
Powell mentioned that the phrase “further progress” indicates they are testing for the right pace and will adjust as necessary. If new fiscal policies are proposed, the Fed will model them, get briefed by staff, and incorporate them into their models once they become law.
As Powell spoke, U.S. Treasury yields trimmed losses, with the 10-year yield down 5.7 basis points at 4.37% and the 2-year yield down 2.7 basis points at 4.241%.
Powell stated that if new fiscal policies are proposed, the Fed will model them, and staff will brief them. Once a law changes, it will be incorporated into the model, a process that takes time. Currently, there’s nothing to model as no new policies are on the table.
He mentioned that the Fed will assess the net effect of any new policies on the economy but noted that nothing is being modeled at the moment. Powell emphasized the need to observe how long higher bond rates will be maintained, though they’re not a major factor at present.
He highlighted that recent economic data has been strong, and while policy remains restrictive, the labor market has cooled and is now balanced. Powell stated that further cooling in the labor market isn’t necessary to meet the inflation target, which is on track to reach 2%.
The current decision is part of the recalibration process, with Powell noting that the Fed is ready to adjust its pace and target for rates. If the labor market worsens, the Fed could act more quickly. Powell also acknowledged the possibility of slowing the pace in the future, which they are beginning to consider, while expecting bumps along the way in the inflation path.
Powell stated that non-housing services and goods inflation have returned to levels seen in the early 2000s. However, housing services inflation remains high as older leases take time to adjust to new, lower rents. He also mentioned that the labor market is not driving inflationary pressures.
He emphasized that inflation is still on a downward path, though it may be bumpy. One or two bad inflation data months won’t derail the process, and there’s no need to rush. Powell reiterated that finding the neutral rate should be done carefully and patiently.
Powell noted that as the economy stays strong, the Fed can navigate a middle path between two risks. The unemployment rate remains low but has risen significantly from a year ago.
Powell stated that he would not resign if asked to, and would not leave if asked by the president. The law doesn’t allow a Federal Reserve Chair to be demoted.
He noted that the labor market is gradually cooling but remains in a good place. The policy aims to maintain this balance while making progress on inflation.
Wage growth is now consistent with 2% inflation, given the current productivity level, which Powell described as a good overall labor market. He added that they do not want the labor market to soften much further from here.
Powell stated that both the economy and policy are currently in a strong position. However, he acknowledged ongoing geopolitical risks and noted that while the economy has not been significantly affected so far, there is always the possibility of future challenges. He expressed confidence that next year could even be stronger than this year.
He also discussed the risks of moving too quickly or too slowly with policy adjustments. Powell emphasized the need to strike a balance, warning that moving too fast could cause problems, while moving too slowly might cause the U.S. to fall behind. The goal is to manage both risks carefully.
Powell reiterated his concerns about the U.S. fiscal path, which he has repeatedly described as unsustainable. Despite this, he pointed out that inflation expectations remain aligned with the 2% target, and he assured that the Fed will not allow expectations to drift higher.
On the issue of neutral interest rates, Powell admitted uncertainty but suggested that the neutral rate is likely below current levels. He emphasized that the Fed’s approach will be cautious to increase the chances of making the right decisions in the future.
Powell acknowledged that people are still feeling the effects of high prices and emphasized that it would take years of real wage growth for individuals to feel an improvement in their financial situation.
He also expressed confidence that the Fed can address inflation while keeping the labor market strong. Raising interest rates is not part of the Fed’s current plan.
Powell stated that, barring any unexpected external events, the economic baseline should remain steady. He reaffirmed that the goal is to reach 2% inflation, noting that undershooting that target wouldn’t be appropriate since low inflation can also be problematic.
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