On 7 November 2024, two days after the US election, the Federal Reserve cut its policy rate by 25 basis points, to 4.50-4.75%. What Powell said and what it means outside the United States.
The Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) decided on 7 November 2024 to lower the target range for the federal funds rate, the US policy rate, by 0.25 percentage points, to 4.50-4.75%. It is the second cut of the cycle, after the half-point cut of 18 September, when the range fell from 5.25-5.50% to 4.75-5.00%. The decision came two days after the presidential election, won by Donald Trump, and had been priced in by markets.
What the Fed said
The statement says that inflation has made progress towards the 2% objective but remains somewhat elevated; that labour market conditions have generally eased and the unemployment rate has risen but remains low; and that the risks to achieving its employment and inflation goals are roughly in balance. The Committee also continues to shrink its balance sheet: it keeps reducing its holdings of Treasury securities, agency debt and agency mortgage-backed securities.
At his press conference, Fed Chair Jerome Powell reviewed the data. GDP grew at an annualised 2.8% in the third quarter; consumer spending prices (PCE) rose 2.1% in the twelve months to September and core inflation, which excludes food and energy, 2.7%; unemployment was 4.1% in October, and employment grew by an average of 104,000 jobs a month over the past three months, a figure affected by strikes and hurricanes.
Powell said that, even after the cut, monetary policy remains restrictive, and that the committee will decide meeting by meeting, according to the data and without any preset course. According to Powell, the labour market has cooled a great deal from its overheated state of two years ago and is now essentially in balance, and in his view no further cooling is needed to bring inflation back to 2%.
On the rise in Treasury yields in the preceding weeks, he said it was not mainly about higher inflation expectations but about the prospect of stronger growth and fewer downside risks, and that the Fed would take financial conditions into account if they were persistent and material, which in his view was not yet the case.
The election and the Fed’s independence
Asked about the effect of the election, Powell replied that in the near term it will have no influence on the Fed’s decisions: neither the timing nor the content of the new administration’s policies is known, and the Fed, he said, does not guess, speculate or assume. Asked whether he would resign if the president-elect asked him to, he said no, and on whether the president could remove or demote him, he said the law does not permit it.
What it means outside the United States
After the cut, the US policy rate remains more than a point above the euro area’s: the European Central Bank (ECB) has had its deposit facility rate at 3.25% since 23 October. For someone with variable-rate dollar debt, the reference rate falls; for someone borrowing in euros, the reference remains the ECB.
Next on the calendar is the Fed’s meeting on 17 and 18 December. Inflation and employment data over the coming weeks and the detail of the new US administration’s economic policy will be the factors to follow. Ask your adviser how this applies to you.
Calibrating the pace of cuts is the hard part of an easing cycle.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
