The Federal Reserve is anticipated to reduce interest rates by a quarter-percentage point at its upcoming meeting, concluding on Thursday. The main concern remains how many further cuts might be necessary to maintain a robust job market without reversing recent inflation declines.
Federal Reserve Chair Jerome Powell's press conference, scheduled for 2 p.m. Eastern time on Thursday, will be the focal point of this week's decision, which lacks the suspense of previous meetings. Powell aims to avoid discussions on contentious policy issues, maintaining the Fed's apolitical stance by postponing their meeting by one day to distance it from the presidential election.
In September, the Fed cut rates by half a percentage point, marking the first reduction in four years. During that meeting, 19 participants were nearly evenly split over whether to implement one or two more cuts this year. Nine members supported one additional cut or fewer, while ten favored two cuts. Another rate reduction in December seems probable but not guaranteed, according to Richard Clarida, former Fed vice chair from 2018 to early 2022.
The election outcome could impact Fed staff economists' assumptions. Officials are unlikely to alter their policy approach until they see President-elect Donald Trump's actions regarding proposed changes in taxes, tariffs, and immigration. If Republicans gain control of both congressional chambers, economists may revise some underlying assumptions at the December meeting.
Four questions highlight why providing meaningful interest-rate guidance may be challenging for the Fed:
1. Will election results lead to significant changes in economic demand or inflation that necessitate a different policy path? Officials will wait for clarity on President-elect Trump's proposals before adjusting their approach.
2. Are concerns about job-market deterioration overstated? Although job growth rebounded in September and unemployment fell slightly in October, uncertainties remain due to weather events and strikes affecting economic clarity.
3. Where is inflation headed? Inflation has been slowing based on the Fed's preferred index; however, some officials might advocate for a slower pace of rate cuts if inflation progress stalls while the economy performs well.
4. What constitutes a normal rate level? As borrowing costs decreased rapidly over two years to combat inflation, officials seek a "normal" setting for rates but lack consensus on what that entails.
Powell remarked during a September press conference that he believes the neutral rate is likely higher than previously thought: “We’re going to find out,” he said.
As rates decrease further, determining an appropriate destination becomes increasingly critical. If economic performance remains strong, those who believe in a higher neutral rate may eventually push for slower cuts to prevent overshooting neutral levels.
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