With October rate cut, Fed seeks to support labor market
Concerns for downside risk in the labor market outweigh those for inflation risk – for now.
The labor market is showing signs of weakening, inflation remains slightly elevated, and negotiations with major trade partners are ongoing. The full breadth of economic data is unavailable because of the US government shutdown.
Against this backdrop, the US Federal Reserve (Fed) lowered interest rates by 0.25% at the conclusion of its Federal Open Markets Committee (FOMC) meeting on October 29. This second rate cut in as many months was widely anticipated.
Fed chair Jerome Powell acknowledged the challenge of setting monetary policy at a time when the committee’s dual mandates – maximum employment and 2% inflation – are in conflict. With inflation at 2.8%, the rate cut acknowledges that downside risks to employment have increased in recent months and moves monetary policy toward a more neutral position.
While Powell made it clear that a third straight cut at the FOMC’s December meeting is not a certainty, Raymond James Chief Investment Officer Larry Adam expects the Fed to remain supportive in the near term.
“Although Fed Chair Powell emphasized that another rate cut in December is ‘not a foregone conclusion, far from it,’ we believe the continued economic slowdown during the fourth quarter makes another rate cut likely in December or January,” Adam says.
The range for the short-term federal funds rate is now 3.75% to 4.0%. FOMC members voted 10-2 to make the quarter-point rate cut. The two dissenting votes were split: one member favored a 0.5% cut and one favored no cut.
Lowering interest rates stimulates the economy by making it less expensive to borrow and, potentially, easier to spend. For example, new loans may be issued at lower rates and rates on variable-rate loans could move lower.
Powell also announced the Fed will conclude its quantitative tightening cycle – during which it sells assets to reduce the size of its balance sheet – on December 1. The Fed previously purchased Treasurys and mortgage-backed securities to infuse the economy with cash, a strategy known as quantitative easing.
The October agenda did not call for the committee to issue an updated Summary of Economic Projections, in which it shares its view on the course of rate changes in a graphic referred to as the dot plot. Powell, however, indicated discussion among committee members about future rate decisions reflected strong differences of opinion.
The next FOMC meeting is scheduled for December 9-10.
All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer are subject to change.
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