Fed Continues its Rate Cutting Cycle as Expected

The Gist

The Federal Reserve announced a 25-basis-point reduction in the target range for the federal funds rate this week, setting it at 4.5% to 4.75%. Previously, the rate was in the range of 4.75% to 5.0%. In addition, it announced that it will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities (MBSs), helping to tighten financial conditions by reducing liquidity in the financial system.

In the press release, the Fed acknowledged that inflation has progressed towards its target but remains "somewhat elevated." Furthermore, the committee expressed that "the risks to achieving its employment and inflation goals are roughly in balance."

The Color

During the press conference following the rate decision, Fed Chair Jerome Powell emphasized that the U.S. economy continues to expand at a solid pace, with resilient consumer spending and a stable labor market. However, Powell noted that core inflation, while easing, is still above the target, and risks remain in adjusting monetary policy too quickly or too slowly. The Fed aims to maintain a careful balance between supporting economic growth and keeping inflation in check, stressing that future rate decisions will be data-driven and adjusted as needed.

GDP: "Growth of consumer spending has remained resilient, and investment in equipment and intangibles has strengthened. In contrast, activity in the housing sector has been weak. Overall, improving supply conditions have supported the strong performance of the U.S. economy over the past year."

Labor Conditions: "Conditions remain solid. Payroll job gains have slowed from earlier in the year, averaging 104 thousand per month over the past three months. This figure would have been somewhat higher were it not for the effects of labor strikes and hurricanes on employment in October... The unemployment rate is notably higher than it was a year ago but has edged down over the past three months and remains low at 4.1 percent in October."

Inflation: "Has eased significantly over the past two years. Total PCE prices rose 2.1 percent over the 12 months ending in September; excluding the volatile food and energy categories, core PCE prices rose 2.7 percent. Overall, inflation has moved much closer to our 2 percent longer-run goal, but core inflation remains somewhat elevated."

The Takeaways

After the Fed began the rate-cutting cycle with a 50bp rate cut, markets better received this week's 25bp cut. Chair Powell stated that he believes the labor market does not need to continue cooling for inflation to reach the Fed's 2% target.

Powell expressed how inflation has improved in recent months. What maintains the core PCE at 2.7% YoY levels is the continued rise in housing costs, specifically older rental agreements adjusting upwards to match current market levels.

Given the abovementioned, markets should keep their eyes on the unemployment rate and improving inflation, specifically housing costs.

The next monetary policy decision is due December 18th.

Read the press release here.

Watch the press conference here.