The Central bank is not moving towards a neutral rate where the interest rates neither shrink nor grow the economy.
The Federal Reserve is lowering US interest rates by 25 basis points to continue its recalibration to encourage economic growth in times of declining inflation. The Federal Reserve’s target is between 4.50 and 4.75 percent.
Fed Chairmen Jerome Powell told the reporters he is optimistic that inflation will continue to decrease, and economic growth will be robust if the policy stance gets reevaluated appropriately.
Mr. Powell added that there is a roughly equal chance of achieving its inflation and maximum employment goals.
The Fed’s move comes less than 48 hours after Donald Trump won the presidential election, raising questions about the direction of future rate cuts. Inflation will rise again as Trump introduces tax cuts and tariff policy.
Mr. Powell, however, stated that election results will not impact the Fed’s decisions since it is uncertain how Trump’s policies will affect the economy.
Additionally, Mr. Powell declines to provide forward guidance on the path of monetary policy as it might vary based on new data.
As inflation continued to decline, the Fed started its easing cycle after maintaining the rates at a 22-year high for almost a year. The Fed preferred inflation indicator dropped to 2.1 percent, just above the long-term target range of 2 percent. Meanwhile, the core inflation was at 2.7 percent.
The US central bank is not moving towards a neutral rate where the interest rates neither shrink nor grow the economy.
Wells Fargo predicts that by the end of the next year, the Fed will reduce its benchmark rate to 2.5 percent to 3 percent. However, the Federal Open Market Committee would not want to ease policy if new tax cuts and tariffs would lead to a sharp increase in inflation over the upcoming years.
According to the CME Group FedWatch tool, markets expect the Fed to reduce rates by more than 25 basis points in December and three times the following year.
There is a likelihood of more tariffs, immigration restrictions, and the fiscal spending that Trump campaigned on, which would make the prior tax cuts permanent. The additional rate cuts may be questioned on the margin, K Sean Cleak, the chief investment officer of Clark Capital Management Group, wrote in a note.
The United Arab Emirates Central Bank will lower its benchmark interest rate by 25 basis points on Thursday to boost the business as inflationary pressure eases.
This is the Fed’s second consecutive rate cut. The central bankers of America are following a progressive approach to rate cuts, which involves issuing smaller rate cuts so that they can assess the impact on the economy.
Mr Powell used the word recalibration to describe the Fed’s policy change, which he said would help the economy strong while continuing to reduce inflation.
Economic growth is getting strong as the gross domestic product increases to 2.8 percent in the third quarter. Consumer spending is also strong, making up almost two-thirds of economic activity, which increased by 0.5 percent in September.
The US labor market is showing signs of continuing to moderate at a healthy rate. The current unemployment rate is still at a record low of 4.1 percent. According to a Bureau of Labour Statistics study conducted this month, the total number of job openings dropped to its lowest level since September 2021.
The latest economic data shows that the Fed is nearing a soft landing, which is an ideal situation where inflation is controlled without an unexpected economic downturn.
It was not expected that the Fed would decide based on the employment gains in October, which fell due to the two hurricanes and strikes by the Boeing machinists.