The Federal Reserve has reduced interest rates by a quarter point to a target range of 4.50% to 4.75%, following a decrease in inflation and a softer labor market. This unanimous decision was made amid the aftermath of Donald Trump’s reelection. Fed Chairman Jerome Powell emphasized that election outcomes would not affect their decisions. Despite progress towards the inflation target, rates remain high, and future cuts may be limited due to the election results. Meanwhile, the Bank of England also lowered its key rate.
Federal Reserve Lowers Rates Amid Evolving Economic Landscape
The Federal Reserve, the central banking system of the United States, announced a quarter-point reduction in interest rates on Thursday, aligning with market expectations. This decision comes in light of a notable decrease in inflation and a more relaxed labor market, coinciding with the day after Donald Trump’s reelection.
This latest rate cut brings the target range to 4.50% to 4.75%, following a previous half-point reduction in September, marking the first significant cut since March 2020. The Fed’s meeting was notably delayed by one day due to the presidential election, which is unusual for their schedule.
Fed Chair Comments on Political Influence and Economic Conditions
During a press briefing, Fed Chairman Jerome Powell emphasized that the recent elections would not influence their immediate decisions. “We cannot predict the timeline or nature of forthcoming reforms, nor their potential economic impacts. We refrain from speculation,” he stated firmly.
The decision to lower rates was unanimous among the 12 voting members of the Federal Open Market Committee (FOMC). The committee acknowledged a general easing in labor market conditions over several months, which followed a period of labor shortages that had previously driven prices higher.
Despite some progress toward the Fed’s inflation target of 2%, Powell noted that inflation remains elevated, with the Personal Consumption Expenditures (PCE) index showing a year-on-year decline to 2.1% in September—the lowest since February 2021. The Fed’s strategy of raising rates to curb demand has seen rates reach their highest levels since the early 2000s, maintained for over a year until the recent adjustments.
Looking ahead, economists Samuel Tombs and Oliver Allen from Pantheon Macroeconomics indicated that the election results could limit the likelihood of further rate cuts in upcoming meetings. Meanwhile, the Fed’s relationship with Donald Trump has been complex, with Trump previously criticizing the Fed’s rate policies, despite initially appointing Powell to his position.
As the economy shows signs of resilience, with recent indicators reflecting strong activity, Jim Bullard, a former president of the St. Louis Fed, remarked on the overall robustness of the American economy. He noted that GDP growth for the third quarter was underwhelming but still significantly outpaced the eurozone, coming in at 2.8% on an annualized basis.
Job growth has slowed, with the lowest job creation figures in October since December 2020, largely attributed to natural disasters and strikes affecting companies like Boeing. Nonetheless, Bullard believes the Fed has successfully navigated towards a “soft landing,” achieving a reduction in inflation without triggering a recession. The Federal Reserve will update its economic forecasts in December, as they did not make adjustments during this meeting.
In a parallel move, the Bank of England (BoE) also held a meeting on Thursday, opting to lower its key rate by a quarter point—the second reduction this year—bringing their rate to 4.75%.