Fed Rate Cut Implications

Fed sticks with a 25 basis point interest rate cut; but uncertainty seems to be a rising worry

The Federal Reserve lowered interest rates by a quarter of a percentage point. The cut was the second this year, following on a larger than usual 50 basis point cut in September. The size of this cut was expected by the financial markets. Wall Street is expecting another 25 basis point cut at the central bank's December 18 meeting.

With the cut and its size so widely expected investors and traders were left trying to find policy hints in the Fed's words.

The pickings were rather slim.

The Fed said the "economic outlook is uncertain," in a unanimous statement released at the end of its two-day meeting. The economy continues to grow at a solid pace, the Fed said. Since earlier this year, the labor market has cooled and unemployment has worsened slightly but remained low. Inflation is cooling but remains somewhat elevated. The Fed's benchmark rate now sits between 4.50% and 4.75%.

"Inflation has eased significantly over the past two years," Fed Chair Jerome H. Powell said in a news conference. But he didn't offer a preview of the next decision. "We don't know the right pace, and we don't know exactly where the destination is. The point is to find that, to find the right pace and the right destination as we go."

Powell dismissed suggestions in his news conference that Trump policies would change anything the Fed plans to do in the next few months, saying that "in the near term, the election will have no effects on our policy decisions."

"We don't know what the timing and substance of any policy changes will be. We therefore don't know what the effects on the economy would be," he added.

Of course, the fact that a reporter asked the question is an indication of how important Trump Administration policies will be.

And later, when asked if the Fed is concerned about deficits potentially going up, Powell said the Fed doesn't comment on fiscal policy. But he added that if there was a rewrite of the tax code, they would revise their economic models.

"That's a process that takes a lot of time and that we go through all the time with every administration constantly," Powell said. "This will be no different."

Wall Street was a little more willing to comment.

"Various policy uncertainties may lead the Fed to move more slowly than it otherwise would," JPMorgan Chase's Michael Feroli said in a research note.

Analysts and investors in the futures market believe that yet another quarter-percentage-point cut is likely at the Fed's final 2024 meeting on December 18. But the pace of additional cuts next year is uncertain.

Deutsche Bank's economists said the Fed's preferred core inflation gauge could now end next year around 2.5% rather than the 2.2% they previously projected, and stick at 2.5% through the fourth quarter of 2026. "These revisions would imply a stalling out in progress on the inflation front over the next two years," the Deutsche Bank team wrote.

JPMorgan Chase was among those shaving back projections for 2025 rate cuts, now seeing a cumulative 50 basis points of reductions in the first half rather than a percentage point, Bloomberg reports. Nomura Holdings economists now expect just one cut from the Fed next year, from four projected before the election.