Fed cuts rates in split vote, but signals pause as inflation remains elevated, labor market uncertain
The U.S. Federal Reserve cut interest rates on Wednesday in another divided vote but indicated it would likely hold off on further cuts in borrowing costs as the U.S. central bank seeks clearer signals on the direction of the labor market and inflation that “remains somewhat elevated.”
New forecasts issued after the Fed’s two-day meeting showed the median policymaker sees only a quarter-percentage-point cut in 2026, the same outlook as in September, with inflation expected to slow to around 2.4% by the end of next year, even as economic growth accelerates to a higher trend of 2.3% and the unemployment rate remains modest at 4%.
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully evaluate incoming data,” the Federal Open Market Committee said of rate-setting in language it had previously used to signal a pause in policy actions – an outlook contrary to market expectations, which remained committed to two rate cuts posted next year, even after her declaration.
At a news conference after the FOMC statement was released, Fed Chairman Jerome Powell said: “I will note that having cut our policy rate by 75 basis points since September and 175 basis points since last September, the Fed Funds rate is now within a wide range of estimates of its neutral value, and we are well positioned to wait and see how the economy plays out.” He added that “monetary policy is not on a predetermined path and we will take our decisions on a meeting-by-meeting basis.”
Stocks were mostly trading higher after the release of the Fed statement and forecasts. The dollar was weaker against a basket of currencies and bond yields were lower.
“It’s definitely a hawkish cut, not so much in the fact that we had two dissenters who wanted to stand pat, but if you look at the ‘dot,’ there were six of them that didn’t go down at all in that meeting,” said Art Hogan, chief market strategist at B. Riley Wealth. The dot plot of Fed policymakers’ rate path projections showed six “dots” to 3.9%, where the policy rate was before Wednesday’s rate cut.
The decision to cut the key policy rate by a quarter of a percentage point to a range of 3.50%-3.75% sparked three disagreements, with Chicago Fed President Austan Goolsbee joining Kansas City Fed President Jeffrey Schmid in arguing that the policy rate should remain unchanged and the Fed cut in half again.
How monetary policy plays out from here, heading into a U.S. midterm election year that could revolve around the economy’s performance and with President Donald Trump urging sharper tapering, will now depend on data still reeling from the impact of the 43-day federal government shutdown in October and November.
SOLID FINANCIAL OUTLOOK 2026
The forecast is in one sense optimistic: interest rates may remain higher than expected, but the economy appears to be growing faster even as inflation falls and the unemployment rate also falls.
However, the latest policy statement and forecasts were created without the benefit of recent employment and inflation reports, and instead relied on “available indicators,” which Fed officials said include its own internal surveys, community outreach and private data.
The latest official unemployment and inflation data are for September and showed the jobless rate rose to 4.4% from 4.3%, while the Fed’s preferred measure of inflation also rose slightly to 2.8% from 2.7%. The Fed has an inflation target of 2%, but the pace of price increases has been steadily rising from 2.3% in April, at least partly attributable to the pass-through of rising import taxes to consumers and a driving force behind the central bank’s policy gap.
Employment and inflation data for November will be released next week, followed later by a detailed report on economic growth for the third quarter.
“Available indicators suggest that economic activity is expanding at a moderate pace,” the Fed’s policy statement said. “Job gains have slowed this year and the unemployment rate has risen through September,” it said, downplaying the reference to the jobless rate as “low.”
Updated forecasts showed a core of six policymakers preferred not to cut rates this year and seven forecast no further cuts in 2026. The median forecast is for a further cut of a quarter of a percentage point in 2027 as well, as inflation continues to slide towards the central bank’s 2% target.
a href=”https://tribune.com.pk/story/2581538/divided-fed-lowers-rates-signals-pause-and-one-2026-cut-as-growth-rebounds”>Source link
