Fed reduces target rate by 25 basis points

In a unanimous decision, the US Federal Reserve (Fed) reduced the fund target rate by 25 basis points (bps) today and was widely priced in by investors. The decision brought the target rate to 4.50-4.75% and followed the 50bp reduction at September’s meeting.

Rate statement

The rate statement maintained its message regarding economic activity continuing to ‘expand at a solid pace’.

In the first paragraph, the statement notes that ‘labour market conditions have generally eased’ compared to the previous message that ‘Job gains have slowed’. The statement also retained the original message regarding unemployment ‘moving up’ yet remaining low.

The statement also removed the word ‘further’ from the sentence: ‘Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated’. Importantly, the statement also removed the sentence: ‘The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent’. This raises the question of whether the Fed is underlining that they could be eyeing a more gradual approach to policy easing and potentially even hinting at hitting the pause button shortly.

Additionally, the statement maintained the message that ‘employment and inflation goals are roughly in balance’; It also emphasised that the ‘economic outlook is uncertain’ and noted that the Federal Reserve is ‘attentive to the risks on both sides of its dual mandate’.

There was no mention of politics in the statement.

Immediate thoughts?

Overall, with a rate cut widely expected, the statement and language changes from the Fed offer little substantial information for the market, especially regarding any indications about whether the Fed might cut rates again next month. The adjustments in the language related to inflation, however, suggest that the Fed is potentially preparing for a pause.

The immediate market response witnessed demand for the US dollar; per the US Dollar Index, we saw the greenback rally 0.2%, though this move was swiftly pared. Major US stock markets maintained their gains, with the S&P 500 at 0.6%, and US Treasury yields saw a mild selloff.

Powell’s presser:

Following Fed Chairman Jerome Powell’s prepared remarks, he opened the floor to Q&A for the press.

Naturally, one of the first questions related to the possible impact this week's US election results may have on the economic and policy outlook. Powell was cautious in his response, stating that there would be no effect in the short term. Powell added: ‘We don’t know what the timing and substance of any policy changes will be […] We don’t guess, we don’t speculate, and we don’t assume’. Still, it is worth noting that Powell wrapped up the presser responding to a question regarding whether he would resign if the newly elected president, Donald Trump, asked him to. He said he would not!

Powell was cautious about revealing too much regarding the value of September's Summary of Economic Projections and informed reporters that more information and data would be available next month. He also kept details vague during the press conference about potential interest rate changes in December.

However, he did mention the most recent inflation figures, noting that the report for September was not concerning. When questioned on the language changes in today’s rate statement, Powell said that modifications to the language were not ‘meant to send a further signal’.

Final thoughts?

This was a difficult presser to follow, and Powell would not disclose much information today. He references that policy is still restrictive and that the Fed is on course to move rates to a more neutral level. He recognised that the labour market is cooling and inflation has moved lower but refrained from answering what would lead the Fed to pause rate cuts.