The US Federal Reserve (Fed) announced that it had cut interest rates by 25 basis points
The US Federal Reserve (Fed) announced a 25 basis point cut in interest rates as inflation fears recede in the face of concerns about a slowdown in the labor market.
In particular, the US central bank announced on Wednesday (29/10) that it is reducing its key interest rate by 0.25 percentage points, placing it in a range of 3.75% to 4% . It is noted that this is the second consecutive interest rate cut this year. Last month, the Fed had cut interest rates for the first time since the reduction last December.
The rate cut was a 10-2 vote , despite the limited data available to the Fed due to the month-long federal government shutdown.
Fed Governor Stephen Miran and Kansas City Fed President Jeffrey Schmidt disagreed.
Governor Stephen Miran voted against again, preferring the Fed to move more aggressively with a 50 basis point cut. St. Louis Fed President Jeffrey preferred the Fed to make no cut at all.
In the statement issued after the meeting, the committee acknowledged the uncertainty arising from the lack of data and clarified how it classified overall economic conditions.
“Available indicators suggest that economic activity is expanding at a moderate pace. Job growth has slowed this year and the unemployment rate has risen sharply, but remained low through August. More recent indicators are consistent with these developments. Inflation has risen since the beginning of the year and remains somewhat elevated.”
The Commission aims to achieve maximum employment and inflation of 2% over the long term. Uncertainty about the economic outlook remains high . The Commission is mindful of the risks to both sides of its dual mandate and assesses that the downside risks to employment have increased in recent months.
Inflation remains above the Fed's 2% target. But while tariffs appear to be pushing up some consumer prices, the softer-than-expected inflation data for September allowed the Fed to focus on strengthening the labor market by cutting interest rates, economists noted.
Of course, inflation has not increased as much as expected, due to the new tariffs imposed by the administration of President Donald Trump, but it rose from 2.3% in April to 2.7% in August, according to the most recent available data.
The Fed's goal is to reduce inflation to 2%.
“Although inflation remains elevated, policymakers are focusing slightly more on downside risks to employment ,” Bank of America economists said in a research note.
Completion of balance sheet reduction on December 1
The Fed also said it was ending the unwinding of its $6.6 trillion balance sheet, amid signs that money market liquidity conditions have begun to tighten and bank reserve levels are falling.
Instead of allowing up to $5 billion in Treasury securities to mature each month and not be replaced, the Fed said that starting December 1, it would now seek to keep its stock of government bonds stable by rolling over maturing Treasury bonds.
The Fed also said it is maintaining its current plan to allow up to $35 billion in mortgage-backed securities to mature each month — a goal it has never met in more than three years of cuts — but starting Dec. 1 it will invest all proceeds from MBS maturities in Treasury bills.
The Fed's shift was expected and comes amid growing signs of pressure in money markets.
Further reduction in interest rates
The Fed's latest cut brings the target for the key lending rate to its lowest level in three years.
Wall Street is betting on another quarter-percentage cut by the central bank at its last meeting of the year, in December.
According to CME FedWatch, investors have estimated that the probability of a cut in December is greater than 80%.
However, a lot can change by then.
The Fed is likely to receive three new employment reports before the December meeting, which could “significantly change the perception of the labor market for better or worse,” Michael Feroli, J.P. Morgan’s chief U.S. economist, wrote in a note.
Powell is under pressure from President Trump, who has repeatedly asked him to cut interest rates.
Trump expressed on Monday (27/10) the possibility of announcing Powell's replacement by the end of the year , whose term ends next May.
Powell, among other things, stated that demand for labor has "clearly declined," while data shows that layoffs and hiring remain low.
“Job growth has slowed significantly since the beginning of the year. Much of the slowdown likely reflects a decline in labor force growth due to lower immigration and labor force participation, although labor demand has clearly declined as well ,” Powell said.
“Downside risks to employment appear to have emerged in recent months”
“During the meeting, there were strong disagreements about the path to take in December ,” Powell said.
"A new reduction in the key interest rate at the December meeting is by no means a given. Monetary policy is certainly not moving according to a predetermined plan."
Markets have already priced in expectations for further rate cuts, and these comments may lead to a revision of those estimates.
The first question Powell received was about these expectations and whether they worried him. He reiterated that there is still no certainty about whether there will be a cut in December:
“In times when our two main objectives conflict, there are strong and different views within the committee. As I mentioned, there were significant disagreements today. The main conclusion is that we have not yet made a final decision for December.”
When asked further about these differences, he explained that they are related to different forecasts.
“A further rate cut at the December meeting is not a given. On the contrary, policy is not on a pre-determined path,” Powell stressed.
At the same time, investors are limiting their bets on a December rate cut. They now estimate a 71% probability , down from 90% previously.
Additionally, Powell was asked about the issue of artificial intelligence, particularly after recent layoffs attributed to the new technology.
“We are seeing a significant number of companies either announcing that they are not planning to hire much or are making layoffs, and they are often referring to artificial intelligence and its capabilities. So we are watching it very closely.”
However, he later added that consumer spending is a much larger part of the economy than artificial intelligence.
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