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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.
Insights
[News] How will a fully Republican administration impact the future trajectory of the U.S. economy?
The U.S. presidential election was held on November 5, and as of 8:00 AM EST on November 6, presidential candidate Donald Trump has secured 295 electoral votes, capturing all seven swing states, effectively confirming his position as the 47th President of the United States.
The Republican Party has also secured 52 seats in the Senate. While the final results for the House of Representatives remain undetermined, current tallies show the Republican Party leading with 204 seats compared to the Democrats’ 188 seats. If the Republicans also gain control of the House, the U.S. will enter a period of unified Republican governance.
(Source: Bloomberg)
Under a fully Republican administration led by Trump, what policies might have an impact on the economy, and how could these policies steer economic trends?
Tariffs and Trade
Trump’s tax policy is expected to focus on extending provisions of the Tax Cuts and Jobs Act (TCJA), including lowering the top personal income tax rate and lifetime individual exemption limits, with plans to make these tax cuts permanent. Additionally, he aims to lower the corporate tax rate from 21% to 15% and exempt tips and overtime pay from income taxes. On the trade front, Trump plans to impose tariffs ranging from 10% to 20% on all imports and up to 60% on Chinese goods.
Immigration
During Democratic administrations, a relatively lenient stance on illegal immigration has led to record-high numbers of undocumented immigrants, posing potential threats to domestic security. Trump’s policy aims to expel illegal immigrants as comprehensively as possible. He has pledged to reinstate his first-term immigration policies, including the “Remain in Mexico” policy and the travel ban. Additionally, Trump plans to halt refugee admissions and reduce the number of legal immigrants entering the U.S.
Energy
Trump favors traditional energy sources and views climate change as “a hoax.” He has promised to “unleash” America’s energy sector by reducing restrictions on oil and natural gas exploration and encouraging the construction of more refineries. Trump also intends to repeal the Biden administration’s Inflation Reduction Act to reduce subsidies for wind and solar energy, as well as electric vehicles, while expediting the approval process for coal and nuclear power projects.
Financial Regulation
Trump’s approach to financial regulation has historically been more relaxed. The Federal Reserve introduced the Basel III Accord draft in July of last year, initially requiring banks with assets exceeding $100 billion to hold sufficient capital to absorb potential losses. In September of this year, the Fed proposed raising the Common Equity Tier 1 (CET-1) capital ratio for Global Systemically Important Banks (G-SIBs), or “too big to fail” banks, to 9%. Trump’s election could potentially lead to the weakening or shelving of Basel III regulations.
Impact on the Economy
Based on the key policies outlined above, we have referred to the report by Oxford Economics to assess how Trump’s policies may influence the economic trajectory.
The report suggests that if Trump is elected with full Republican control, the extension of the TCJA and the exemption of tips and overtime pay from income taxes could boost real GDP by 1% in the short term. However, over the long term, economic growth could slow due to restrictive immigration policies and increased tariffs on imports.
(Source: Oxford Economics)
Regarding inflation, fiscal expansion and higher import tariffs are projected to raise inflation by 0.8 percentage points. However, the Federal Reserve is expected to halt interest rate cuts by 2026 and begin raising rates in 2027 to prevent runaway inflation.
(Source: Oxford Economics)
In summary, under a fully Republican administration led by Trump, tariff policies are likely to be swiftly enacted through executive orders, while the continuation of the Tax Cuts and Jobs Act (TCJA) is expected to further drive individual asset growth. At the same time, corporate tax cuts could attract capital inflows and potential fiscal spending expansion, boosting short-term GDP growth. However, the potential labor shortages resulting from the expulsion of illegal immigrants, along with inflationary pressures stemming from tariff policies, may pose downside risks to long-term GDP growth.
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(Photo Credit: Donald J. Trump Facebook)
Insights
[News] U.S. Services Sector Continues Expansion, Reaches Highest Level Since Mid-2022
The U.S. services PMI expanded for the fourth consecutive month in October, rising from 54.9 in September to 56.0—its highest level since July 2022, according to data released by the Institute for Supply Management (ISM) on November 5.
Business Activity & New orders
In the subindices, the business activity index slightly declined from 59.9 to 57.2, and the new orders index fell from 59.9 to 57.4. However, both indices stayed in expansion territory for the fourth month, reflecting strong demand in the U.S. services sector.
Employment & Supplier Delivery
The employment and supplier delivery indices also improved, with the employment index climbing from 48.1 to 53.0, reaching its highest level since August 2023. This improvement suggests that previous employment data may have been influenced by short-term factors like hurricanes and strikes. Meanwhile, the supplier delivery index increased from 49.6 to 52.1, likely indicating delayed delivery times due to disruptions from recent storms and port strikes.
Other indices showed continued expansion, with the prices index marking its 89th consecutive month in growth, while export and import indices slightly softened but remained above 50.
Overall, October’s services PMI offers a solid start for U.S. economic data in the fourth quarter. According to the ISM report, the October services PMI correlates with an annualized real GDP growth rate of 2.3%.
This contrasts sharply with the manufacturing PMI, which was recorded at 46.5 in October, down 0.7 points from the prior month, marking seven consecutive months in contraction. The gap between the services and manufacturing PMIs widened to 9.5 points, underscoring the growing divergence between the two sectors.
ISM Industry Comments
“Material availability and delivery continues to improve. The port strike had an impact, as we had to divert shipments, but the overall costs are not material. Services cost remains elevated but easier to negotiate.” – Accommodation & Food Services
“Monitoring inventories much closer than in the past. We’re refilling inventories for the fall and winter seasons are lower level than normal, but those decisions are easy to understand.” – Agriculture, Forestry, Fishing & Hunting
“Business is good. Building backlog. Commercial Construction is strong. Commercial Service is busy. All other areas are level.” – Construction
“Hurricane Helene seriously damaged an IV production plant in North Carolina, which was 60 percent of all national supply of IV bag fluid/solution. We are now starting to experience shortages. In addition, two hurricanes hit Florida, which impacted many of our lab vendors. Plus, the port workers’ strike impacts shipments of materials that our (U.S.) labs use to manufacture medicine and medical supplies. We anticipate a rise in prices and longer wait times, and most likely, shortages of some supplies.” – Health Care & Social Assistance
“Sadly, the recent hurricanes/tornadoes, and any future climate-related catastrophes, are good for the equipment sales and rental businesses. That and the continued infrastructure spending.” – Information
“Revenue cycles are lengthening. Good sales, but longer service periods. Commodity pricing is stabilizing as inflation concerns ease. Business is in a steady state, with everyone holding an even keel awaiting U.S. election results.” – Professional, Scientific & Technical Services
“Hurricane impacts have affected supplier deliveries.” – Real Estate, Rental & Leasing
“Port strikes did not impact our supply chain, but we confirmed all our strategic vendors had plans in place should they have an impact.” – Retail Trade
“Business is booming, nothing slowing down. Prices continue to increase slightly.” – Utilities
“The economy is still causing issues within our business and that of our suppliers.” – Wholesale Trade
Insights
[New] Why Have U.S. Treasury Yields Continued to Surge Recently?
Following the Federal Reserve’s two-rate cut and release of its latest Summary of Economic Projections (SEP) on September 18, the U.S. 10-year Treasury yield has surged by 60 basis points over the past two months, from around 3.7% to approximately 4.3%. Why have Treasury yields risen so sharply? We attribute this trend to several key factors:
Market Overestimation of Rate Cuts
Earlier, the market was more optimistic about rate cuts, generally expecting that a potential recession in the U.S. would prompt the Fed to lower rates by over 11 cuts in this cycle. As a result, the 10-year Treasury yield declined to around 3.65% between July and September. However, the SEP released on September 18 indicated that rate cuts may only total approximately 10 basis points in this cycle, with the Fed expressing confidence in managing inflation and stabilizing the labor market. This shift led the market to recalibrate expectations, pushing the 10-year Treasury yield up by 20 basis points to around 3.85%—a key initial factor behind the rise in yields.
(Source: Fed)
Stronger-than-Expected Economic Data
At the Fed’s meetings in July and September, the emphasis shifted from inflation to the labor market, with the market trading Treasuries based on the notion that “a deteriorating labor market could trigger a recession in the U.S.”
However, unexpectedly, the employment data released on October 4 significantly exceeded market expectations. Non-farm payrolls for September saw a substantial increase, and the unemployment rate declined once again. Although October’s non-farm payroll data showed a sharp drop, this was primarily due to temporary impacts from hurricanes and strikes. The ADP data indicates that the job market remains robust, which has led the market to raise its interest rate expectations again. As of November 1, the U.S. 10-year Treasury yield has risen to approximately 4.38%.
(Source: CME, FedWatch, TrendForce)
Additionally, recent data on retail sales and GDP have highlighted robust consumer spending, with consumer confidence also climbing steadily. These indicators underscore the resilience of the U.S. economy, contributing to the recent rise in Treasury yields.
Potential Debt Expansion in Coming Years
While the U.S. Treasury on October 30 announced no changes to its long-term bond issuance size and the Treasury Secretary signaled that issuance would remain steady for upcoming quarters, potential increases in U.S. debt may be inevitable. The lack of a strong focus on deficit reduction among presidential candidates in the ongoing election cycle suggests debt growth may persist, which is another significant factor driving up recent Treasury yields.
Overall, if economic data continue to show strength, the Fed’s ability to cut rates may remain constrained. Meanwhile, though the Treasury plans to maintain issuance levels in the short term, the absence of a deficit reduction focus among candidates signals ongoing risks of fiscal expansion. These factors are likely to exert further upward pressure on U.S. Treasury yields.
Insights
Key Focus This Week: China’s NPC Standing Committee and the U.S. Presidential Election
Last week, U.S. equity markets experienced a pullback, primarily driven by declines in the tech sector, leading the S&P 500 to drop 1.37%. In the bond market, decreasing election uncertainty and a resilient labor market caused yields on 2-year and 10-year Treasuries to rise to 4.212% and 4.386%, respectively, slightly widening the yield spread to 16 basis points. Meanwhile, the dollar index remained steady around 104.
Key Economic Data Review for Last Week:
U.S. Q3 GDP: U.S. Q3 GDP grew at an annualized rate of 2.8% (previous: 3.0%). Consumption rose by 3.7% (previous: 2.8%), contributing 2.46 percentage points, while imports grew by 11.2% (previous: 7.6%), with a negative contribution widening, reflecting strong consumer demand. Residential investment and inventory changes acted as primary drags, but as rate expectations ease and election uncertainty dissipates, the housing market and corporate investment are expected to strengthen.
Bank of Japan Rate Decision: The Bank of Japan held rates steady at 0.25%, in line with market expectations. BOJ Governor Kazuo Ueda indicated that if economic performance aligns with projections, further rate hikes could be implemented. He also stated that with a more stable market environment, the BOJ no longer needs extra time to observe market dynamics.
U.S. October Employment Data: Due to the impacts of hurricanes and the Boeing strike, October nonfarm payrolls increased by only 12,000 (previous: 223,000), while the unemployment rate held at 4.1%. However, ADP data shows private-sector employment rose by 233,000 (previous: 159,000), suggesting a robust labor market when unaffected by temporary factors.
Key Economic Data Review for This Week:
China NPC Standing Committee (11/4 – 11/8): Markets will closely watch for additional fiscal stimulus measures and debt issuance aimed at boosting domestic demand. According to Reuters, the upcoming policies could total approximately 10 trillion yuan ($1.4 trillion).
U.S. Presidential Election (11/5): Odds from RealClear Politics and various betting platforms indicate Trump as the likely winner of this election. Polls, however, show both candidates in close contention, with results from key states expected between 11/6 and 11/8.
U.S. Monetary Policy Decision (11/7): Recent U.S. economic data has been strong, with core PCE growth in Q3 easing to 2.2% (previous: 2.8%). Despite a lower-than-expected nonfarm payroll increase of 12,000 in October (due to hurricanes and strikes), the unemployment rate remains at 4.1%. With the labor market still stable, markets anticipate the Fed will cut rates by 25 basis points at this meeting, with another 25-basis-point cut expected in December.
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