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[News] FOMC Summary: Fed Rate Cut by 25 Basis Point, Shift Policy Stance to Neutral
The U.S. Federal Reserve announced a 25 bps rate cut to 4.5%-4.75% at its monetary policy meeting on November 7, aligning with market expectations.
In its statement, the Fed removed the phrase “job gain have slow” and replaced it with “Since earlier in the year, labor market conditions have generally eased.” Additionally, the Fed dropped the language stating it had “greater confidence that inflation is moving sustainably toward 2 percent,” and reaffirmed the committee’s view that risks related to both inflation and employment are now roughly balanced.
Regarding future monetary policy adjustments, the Fed eliminated the reference to “the progress on inflation and the balance of risks” and reiterated that it will continue to base rate adjustments on current economic data, outlook, and the balance of risks. The Fed also emphasized that it will persist in reducing its holdings of Treasury securities, agency debt, and MBS to achieve maximum employment and a return to 2% inflation.
Overall, the Fed’s stance has shifted from the highly dovish position in September to a more neutral one. Unlike the previous meeting, where one member dissented on a 50 bps rate cut, this time all members supported a 25 bps cut, reflecting the resilience of the U.S. economy and a diminished perception of downside economic risks.
According to FedWatch data, the market now anticipates that the Fed will cut rates by 25 bps each in January, March, and June of 2025, bringing the rate down to 3.75%-4%, compared to the previous expectation of four 25 bps cuts in 2025.
(Source: FedWatch)
Post-Meeting Press Conference Q&A Highlights
Q1: One year ago, the 10-year Treasury yield was at 5%, while the 30-year mortgage rate stood at 8%. At the time, the Federal Reserve expressed concerns that further rate increases could pressure the economy. Now, despite the Fed easing restrictive policies, the 10-year Treasury yield continues to climb. How does this differ from the risks seen a year ago?
A1: The Federal Reserve acknowledges the rise in Treasury yields. However, these increases may more accurately reflect stronger-than-expected U.S. economic growth or a reduction in downside risks related to a potential recession.
Q2: Given the current economic environment, is the September SEP (Summary of Economic Projections) rate path still relevant?
A2: Overall, economic performance has indeed surpassed expectations. The upward revisions in NIPA (National Income and Product Accounts), strong September employment, and robust October retail data all support this view. As a result, downside economic risks have diminished, and we will continue to incorporate such factors into our assessments. Additionally, we have upcoming reports in December, including one more employment report, two inflation reports, and other economic data, which we will use to inform further policy decisions.
Q3: The latest PCE (Personal Consumption Expenditures) growth is 2.1%, which is very close to the Fed’s target, yet core PCE remains at 2.7% and has been steady at this level since July. Why did these figures not prompt the Fed to pause rate cuts at this meeting?
A3: The 3-month and 6-month annualized core PCE growth stands at 2.3%, indicating notable progress on inflation. However, we expect some volatility. For example, the core PCE annual growth rate was exceptionally low in the last three months of last year but saw a seasonal uptick in January 2024. We anticipate further declines by February next year. Currently, core PCE excluding housing services and goods (approximately 80% of core PCE) has already fallen to 2%—comparable to levels in 2000—and housing services inflation should ease as new lease agreements are signed. Moreover, labor market conditions are no longer contributing to inflationary pressures. While we are not declaring a full victory over inflation, we are confident that inflation can steadily decline to 2% within this scenario without being disrupted by one or two months of short-term data fluctuations.
Q4: Is the Federal Reserve actively working toward achieving a neutral rate, or does the Fed have a timeline for reaching this neutral rate target?
A4: Given the current economic landscape, the Federal Reserve is not rushing to reach a neutral rate. As long as the economy remains strong, we believe we can identify a reasonable rate path that balances the risks of easing policy too quickly or too slowly.
Comparison of the September and July FOMC Statements
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slow Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In light of the progress on inflation and the balance of risks In support of goals , the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent 1/4 percent point to 4-1/2 to 4-3/4 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against this action was Michelle W. Bowman, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.
