The Fed Continues its Rate Cuts Against the Backdrop of the Election

The Fed Continues its Rate Cuts Against the Backdrop of the Election

Published on: November 8, 2024

Category: News

In line with market expectations, the US Federal Reserve (Fed) lowered its policy rate by 25 basis points on Thursday. This recent move, which brings the federal funds target rate within a range of 4.50-4.75%, follows a half-percentage point cut in September.

The central bank justified its decision by citing lower inflation and an easing labour market in the lead-up to the US election. “Labour market conditions have been generally easing for several months…” following a period of labour shortages which had pushed prices up, according to a statement from the Federal Open Market Committee.

“We remain confident that, with appropriate policy recalibration, the strength of the economy and the labour market can be maintained with inflation falling to 2% on a sustainable basis”, said Fed Chair Jerome Powell at a press conference. He was also optimistic about the prospects for a “soft landing”, in which the United States economy avoids a recession while inflation returns to normal.

The Fed’s decision was not accompanied by an update of the economic projections, which will be provided at the next meeting on December 18th.

During the Q&A session, Chair Powell said that the Fed was moving towards a more neutral stance and that he was not very concerned about the Core Personal Consumption Expenditures (PCE) price index year-on-year inflation exceeding total PCE inflation. He pointed out that non-housing services and goods have returned to their price stability levels.

Only housing inflation remains higher, but it takes several years to adjust and does not reflect the actual price dynamic. The Chairman indicated that he was looking at the 3-month and 6-month annualized PCE price index, as these rates are lower than the year-on-year inflation rate. Also reassuring was the fact that the Chairman explicitly mentioned the base effect at the start of 2025, which will prompt disinflation.

Near the end of the press conference, the Chair replied with a curt “not permitted under the law (1)” in answer to a question raising the possibility that he could be demoted by the President-elect.

1. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20241107.pdf