EconoFACTS

November 07, 2024 | 15:27

Fed Still On Easing Track But Treading Carefully

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

As expected the Fed lowered rates another 25 bps today to a range of 4.50%-to-4.75% amid a unanimous vote, but the pace of further reductions could hinge on continued inflation progress. The Committee repeated that the risks to the economic and inflation outlooks were "roughly in balance". The economy was growing "at a solid pace", labour markets have "generally eased", and inflation had "made progress toward" the target though "remains somewhat elevated". The statement omitted the phrase about gaining confidence in inflation moving sustainably toward the target, but Chair Powell later clarifed that this phrase was no longer needed and its omission was not a sign of the Fed losing confidence in the inflation outlook.

There was little market reaction to the statement.

Speaking after the announcement, Chair Powell repeated that the labour market was not a source of inflation pressure. On the other hand, recent stronger data, including upward revisions to personal income, have removed some downside risks to the economic outlook. He noted that the election will have no near-term effects on policy as the Fed will refrain from changing its economic forecast until it knows more about the timing and substance of the new policies from the incoming administration. He also said that changes in financial conditions (e.g., equities are ripping higher, but bond yields and the dollar have also popped) would need to persist before they affect the Fed's forecast and, hence, policy decisions.

Powell stressed that the Fed is still aiming to recalibrate policy as rates remain "restrictive". However, it doesn't want to move either too quickly or too slowly, and will strive to stay on "a middle path" toward a more neutral rate. So, the Fed is still planning more rate cuts, but will proceed cautiously and will adjust the pace of decline (either faster or slower) as its confidence in achieving the inflation target changes. Its confidence, in turn, will largely depend on incoming data.

Bottom Line: In the September 'dots plot' a slight majority of policymakers leaned toward another 25 bps of cuts by year-end (after today's move). We still lean in this direction too, but much will come down to the next set of inflation and job reports, and perhaps some cooling in overall economic growth.