Fed Lowers Rates for the Second Time

Late on Thursday, 7 November, the US Federal Reserve announced that it has lowered its base interest rate by a quarter percentage point for the second consecutive meeting after cutting by a half percentage point in September. This decision, aimed at bolstering the nation’s economic growth, aligns with predictions made by The Gaze three weeks ago. This ongoing trend of rate reductions by the Fed is expected to have repercussions for the Eurozone’s economy as well.

Federal Reserve Chairman Jerome Powell indicated in September that further rate cuts would be possible if certain conditions were met, primarily if inflation continued to slow. The September rate reduction lowered the rate from a range of 5.25-5.5% to 4.75-5%, marking a significant half-point drop and the first rate cut in four years. As a result, the Fed’s base rates now stand at 4.5-4.75%. The Fed’s next meeting is scheduled for 17-18 December, and it is likely that another quarter-point cut, bringing the rate to 4.25-4.5%, could be forthcoming.

The Fed continues to approach rate cuts cautiously, acting only when sustained reductions in inflation are observed. The primary goal remains to control inflation. In its statement, the Federal Open Market Committee (FOMC) noted that inflation had reached its 2% annual target, although this level is still considered somewhat elevated. The Fed’s interest rate reduction programme aims to maximise employment while keeping inflation below 2%.

Following the FOMC meeting, members concluded that risks surrounding employment levels and inflation were relatively balanced but acknowledged a high degree of uncertainty even in the near term. They cited various sources of uncertainty, including employment data, inflation, international and financial events. This includes actions taken by other central banks, particularly the European Central Bank, the Bank of England, and the Bank of Japan, as well as tensions in regions such as the Middle East and the ongoing war in Ukraine.

Despite the uncertainty, Powell has expressed confidence, though he refrained from making any concrete promises regarding the Fed’s future policy direction.

“This further recalibration of our policy stance will help sustain the strength of the economy and the labour market and will continue to contribute to progress on inflation as we gradually move toward a more neutral position,” said Federal Reserve Chairman Jerome Powell late on 7 November.

One of the most notable elements of Powell’s statement was his assertion that the Fed’s decisions would not be influenced by the current US presidential elections. He suggested that fiscal policy changes would not occur soon enough to impact the Fed’s actions in the coming months. However, it’s worth considering both Donald Trump’s campaign promises and the fact that the Republican Party, to which the new White House occupant belongs, now holds a majority in both houses of Congress. Key economic aspects of Trump’s platform include promises to impose more aggressive tariffs on imports, continue tax reductions, and further deregulate business, especially in the energy sector. What are the potential consequences?

In the short term, these measures could lead to a slight increase in inflation along with stronger employment growth. Consequently, the Fed may have less incentive to continue rate cuts at the current pace of a quarter to a half-point every two months.

The Fed’s current policy approach, spearheaded by Powell, is likely to remain in place. Powell’s term ends in May 2026, and there are already signs that Trump has no immediate plans to replace him. This may be because the current Fed leadership has effectively managed inflation, a key issue in the recent presidential race. Additionally, Trump originally elevated Powell to his current position during his first term.

At a press conference held the day after the presidential election, Powell responded directly to questions about his plans and the possibility of being dismissed by the new president. He stated that he does not intend to leave his position voluntarily and noted that the president does not have the legal authority to remove him.

As of September, inflation in the US stood at 2.1%, close to the Fed’s target, marking a significant achievement as it represents the lowest inflation rate since early 2021. The GDP growth rate, too, appears positive, with an annualised increase of 2.8% in the third quarter.

As for the impact abroad, it is likely that the European Central Bank will continue its own rate reductions. On 17 October, at a meeting in Ljubljana, Slovenia, the ECB lowered rates for the third time this year. The ECB has been able to take this step to stimulate economic growth, as inflation in the EU has slowed somewhat faster than anticipated in recent months. The next ECB meeting is scheduled for 12 December at its headquarters.

This almost synchronous reduction in rates suggests relative stability between the euro and the US dollar. Since the ECB’s first rate cut in June, the exchange rate has fluctuated within a range of $1.0686 to $1.1196 per euro as of 30 September. Since late September, the euro’s exchange rate has gradually declined, albeit with fluctuations, reaching $1.0785 per euro.

Market reactions to the Fed’s decision have been somewhat muted. Gold and oil prices have shown limited movement, likely because markets had already anticipated the Fed’s decision.