The Federal Reserve, in a move that was largely anticipated, lowered interest rates by a quarter point today, bringing the target Fed Funds Rate range to 4.25%-4.5%. The decision, with almost all but one Committee member voting for the cut, underscores the Committee’s cautious approach to monetary easing, providing a sense of reassurance to the market.
Chairman Powell’s comments underscored the Federal Reserve’s dual mandate of managing inflation and maximum employment, reflecting a more neutral policy stance. He emphasized the Committee’s flexibility in adjusting policy as needed, instilling confidence in the Fed’s ability to respond to changing economic conditions.
Chairman Powell was clear about moving slowly with their actions. He indicated the desire not to cut too much and then have to raise rates if inflation rises again. The Committee dropped the expectation on cuts from 4 to 2 cuts for 2025, a decision influenced by the economic conditions in late 2024, particularly the persistence of higher prices. He also indicated he thinks the economy is in a good starting place in 2025. Growth is stronger than expectations, unemployment is lower, but inflation is higher, thus the reasoning for the current approach and risk management.
Chairman Powell, when asked about the possibility of tariffs and their potential impact, assured that the Committee is considering all relevant factors in its decision-making process. While this issue is not currently on the table, the Fed is actively forecasting how tariffs could affect various areas of the economy should they need to consider it in the future.
Regarding Core PCE projections, expectations for next year are 2.5%, which suggests the economy will be moving at a steady pace. Powell said the Committee is aware of the high longer-term rates, such as mortgage and car loan rates, but managing the short-term rates should eventually affect these longer-term rates.
Finally, the Chairman remains confident that the Committee is seeing considerable progress on the dual mandate, and the overall picture of why inflation should be going down is still intact. He said,
“We are still unwinding from these large shocks, and some have not been felt till recently, like insurance costs.”
Powell added:
“As for additional cuts, we’re going to be looking for further progress on inflation and continued strength in the labor market. As long as these markets are solid, we can consider further cuts.”
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