Interest Rate Decision and Key Economic Indicators
The Federal Reserve has lowered its policy rate by 25 basis points, setting the new range at 3.75%-4.00%. This decision marks the second consecutive rate cut and was in line with market expectations. However, the decision was not unanimous, with two members of the Federal Open Market Committee (FOMC) voting against it, indicating a growing divergence of views within the board.
Key highlights from Federal Reserve Chair Jerome Powell's subsequent remarks indicated that current data suggest the economic outlook has not significantly changed. The labor market is perceived to be gradually cooling down, while inflation levels remain slightly elevated. Current data also show the economy growing at a moderate pace. Prior to the government shutdown, data had suggested the economy might be on a more robust path. Currently, data indicates that layoffs and hiring remain at low levels.
A government shutdown is expected to temporarily slow economic activity. Downside risks to employment appear to have increased in recent months. Inflation expectations have risen recently, though most long-term inflation expectations are still in line with the target. Additionally, high customs duties are contributing to increased prices for some goods.
Kansas City Fed President Jeffrey Schmid dissented, voting to maintain the current rate level and stating that a rate cut was premature. Fed member Stephen Miran advocated for a more aggressive 50 basis point cut.
Balance Sheet Policy and Economic Outlook
In addition to the rate decision, the FOMC announced that the Federal Reserve will conclude its quantitative tightening of its balance sheet as of December 1st. Currently, the Fed is reducing its holdings of Treasury bonds by $5 billion per month and mortgage-backed securities (MBS) by $35 billion. Following this date, the principal received from MBS redemptions will be reinvested in short-term Treasury bonds.
The official decision statement indicated that current indicators suggest economic activity continues to expand at a moderate pace. The statement emphasized that employment growth has slowed over the year, and while the unemployment rate has slightly increased, it remains low. It also noted that inflation has risen since the beginning of the year but continues to be above the target.
The Committee reaffirmed its commitment to maintaining its long-term target of maximum employment and 2% inflation. However, it acknowledged that uncertainties surrounding the economic outlook remain high, and downside risks to employment have increased in recent months.