The Federal Reserve (Fed) recently announced its decision to reduce the target range of its Fed Funds Target Rate (FFTR) by 25 basis points to 4.50-4.75% during its Federal Open Market Committee (FOMC) meeting on November 6-7, 2024. This move was in line with market expectations and was accompanied by a 25-bps cut in the interest rate paid on reserves (IOER) balances to 4.65%. While the pace of Quantitative Tightening (QT) remained unchanged, the decision reflected the Fed’s commitment to supporting economic growth.
The updated monetary policy statement (MPS) showed notable changes, including the removal of statements regarding inflation confidence, and a simplification of language around inflation progress and risks. Federal Reserve Chair Jerome Powell clarified that these changes were not meant to signal anything specific but rather reflected ongoing assessments of economic conditions. Powell also addressed political questions, reassuring that election outcomes would not impact policy decisions, and stating that he has no intentions of resigning if asked to do so by President-elect Trump.
Amidst speculation about the Fed’s independence under a new administration, the consensus remains that gradual rate cuts will continue into 2025. The current forecast includes one more 25-bps cut in December 2024, bringing rates to 4.25-4.50% by year-end. Additionally, projections indicate a total of 100 bps cuts in 2025, with quarterly rate reductions of 25-bps. The final rate cut is expected in the first quarter of 2026, bringing the terminal rate to 3.25%.
The Fed’s decision to lower interest rates reflects a cautious approach to supporting economic growth while maintaining price stability. Powell’s commitment to his term until May 2026 demonstrates continuity in monetary policy, despite potential political pressures. By providing minimal forward guidance, the Fed aims to remain flexible in responding to evolving economic conditions and challenges.
Overall, the Fed’s recent decisions and statements suggest a commitment to gradual easing measures in response to economic uncertainties. As the US prepares for a new administration, the central bank’s independence and policy continuity will remain key considerations for market participants. With a carefully managed pace of rate cuts, the Fed aims to strike a balance between supporting economic expansion and managing inflation risks in the coming years.
