The Federal Reserve on Thursday approved its second consecutive interest rate cut, this time opting for a less drastic reduction. Following September’s significant half-percentage point reduction, the Federal Open Market Committee (FOMC) lowered the benchmark overnight lending rate by a quarter point to a target range of 4.50 percent to 4.75 percent.
The rate, which adjusts the cost of money among banks for very short-term loans, also indirectly impacts mortgages, credit cards and auto loans, consequently affecting consumers.
The decision was widely expected by markets, which had already picked up on the Fed’s intentions through statements following the September meeting. This time, the decision was unanimous, unlike the previous one when there was the first negative vote cast by a regional Fed Governor since 2005. Even Michelle Bowman, who had previously expressed reservations, supported the cut.
In its statement following the meeting, the Fed updated its assessment of the economy, reporting slight changes. Now, the Committee considers the risks to the achievement of the employment and inflation targets to be “balanced,” while in September it had expressed more confidence that inflation would come down-reflecting the growing emphasis on labor market support.
The statement also pointed to some easing of conditions in the labor market: the unemployment rate has risen slightly but remains at moderate levels, and the economy “continues to grow at a solid pace.”
The change of course was described by Fed officials as an attempt to realign the rate structure with an economy in which inflation is gradually moving back toward the central bank’s 2 percent target, while the labor market is showing signs of cooling. Fed Chairman Jerome Powell has often talked about “recalibrating” monetary policy to make it less restrictive, as the priority is no longer just curbing inflation.
GDP grew 2.8 percent in the third quarter, a lower-than-expected pace and slightly lower than in the second quarter, but still above the historical U.S. average of around 1.8 to 2 percent. According to the Atlanta Federal Reserve’s projections, growth for the fourth quarter is expected to be around 2.4 percent.
The Fed’s goal remains a “soft landing” for the economy, a delicate balance that will allow it to bring inflation under control without triggering a recession.
Meanwhile, economists expect President-elect Trump’s policies to exert significant inflationary pressures, given his intention to impose tariffs and initiate a deportation program for undocumented immigrants. In his first term, however, inflation has remained subdued, and the economy has maintained a good pace of growth, except for the initial phase of the pandemic.
