In their latest meeting, the Federal Reserve (Fed) decided to cut interest rates by 25 basis points, bringing the target range to 3.75% - 4.00%. This decision marks the second consecutive time the Fed has lowered interest rates. However, the consensus wasn't unanimous, with Mester voting for a larger 50 basis point cut, while Schmid preferred to keep rates unchanged.
In addition to the rate cut, the Fed announced that it would end its balance sheet reduction program, effective December 1st. After this date, principal payments from mortgage-backed securities will be reinvested in short-term Treasury bills.
The press conference following the meeting introduced a level of uncertainty. Fed Chairman Jerome Powell stated that this rate cut was a similar risk management action to the one taken in September. However, he emphasized that a December rate cut is far from guaranteed, and the absence of economic data could justify a pause in rate adjustments. He noted that there were significant divisions within the committee regarding the future course of action, with an increasing number of officials favoring a delay in further cuts.
Powell pointed out that a potential government shutdown is hindering the flow of economic data, but the available data suggests that the outlook hasn't changed significantly. He emphasized that the Fed is closely monitoring the labor market, which is showing signs of gradual cooling. He also expressed concern about inflation, which remains slightly elevated, although long-term inflation expectations remain stable.
The market reaction to Powell's remarks was swift and decisive. After initial volatility, risk asset prices declined, and Treasury yields and the dollar rose. This shift in market sentiment reflects an increase in uncertainty about the future path of Fed monetary policy.
As of this writing, markets are pricing in a 65% chance of a rate cut by the Fed in December, down from 83% before the meeting. Rate expectations for the end of next year have also risen by 4 basis points to 3.04%.
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