The Federal Reserve announced the second consecutive cut in its interest rate benchmark on Thursday, a move widely anticipated by investors.
The Fed said it will now target a range of 4.50 percent to 4.75 percent for the federal funds rate, the rate banks charge each other to borrow reserves, one-quarter of a point below the target announced in September.
This marks a moderated approach compared to the Fed’s earlier, sharper 50 basis point cut in September, reflecting a recalibration of monetary policy. The Fed’s decision to announce the larger rate cut in September, just weeks before the presidential election, was widely criticized by Republicans as creating the appearance of inappropriate politicization.
That cut saw the first dissenting vote by a Fed governor in nearly two decades. Governor Michelle Bowman, who previously dissented, supported the decision this time around.
The Fed’s statement suggested a shift in its economic outlook. It noted that risks to its dual mandate—maximizing employment while stabilizing prices—are “roughly in balance,” signaling a slight departure from its earlier confidence in taming inflation. The prior statement had indicated that Fed seemed more concerned about a slowdown in the labor market and more confident that inflation would return to its target.
The Fed meeting, which traditionally runs from Tuesday to Wednesday, was postponed due to Tuesday’s presidential election, which delivered a decisive victory for Donald Trump.
President-elect Donald Trump’s victory, coupled with expected Republican majorities in Congress, could set the stage for significant shifts in the economic landscape, with potential changes to taxes, spending, immigration, and trade policies on the horizon. This anticipated alignment in Washington has fueled a rally in stocks, with many investors expecting economic growth to be recharged by Trump’s policies.
Trump’s promise to raise tariffs is widely seen as complicating the Fed’s task. Some economists have said that tariffs lead to more inflation, although economic theory and history suggest those concerns are unfounded. At worst, a tariff would likely cause a one-time increase in some prices, not the kind of broad, ongoing inflation that would prompt a reaction from the Fed.
As well, the president-elect’s promise to remove illegal aliens and tighten border security is seen by some as potentially raising labor costs, which could feed inflation by increasing the incomes of U.S. workers. That view, however, conflicts with claims by many economists that immigrant labor does not depress the wages of workers already in the U.S.
Powell said in a press conference on Thursday that the Fed’s policy was not yet being impacted by Trump’s re-election.
“Here, we don’t know what the timing and substance of any policy changes will be,” Powell said. “We therefore don’t know what the effects on the economy would be.”
Even before the election, financial markets had become skeptical of the Fed’s shift toward easing. Treasury yields and mortgage rates have both climbed since the September cut and futures markets now indicate far fewer cuts ahead than anticipated earlier. The rising rates may indicate that the market thinks inflation will be more persistent than the Fed expects.