The Federal Reserve announces a 25 basis point rate cut, emphasizing that supporting employment and controlling inflation are equally important

According to the Zhitong Finance APP, after a significant rate cut of half a percentage point in September, on Thursday, the U.S. Federal Open Market Committee (FOMC) lowered the benchmark overnight lending rate by a quarter of a percentage point, or 25 basis points, to a target range of 4.5%-4.75%. This rate affects the cost of overnight borrowing between banks and also impacts consumer credit tools such as mortgages, credit cards, and auto loans.

The market widely anticipated this move, as the September meeting and subsequent statements from policymakers conveyed relevant information. Unlike the last instance where there was a dissenting vote from a Federal Reserve governor for the first time since 2005, this vote was unanimous, with Governor Michelle Bowman also supporting the decision.

In the post-meeting statement, the Federal Reserve slightly adjusted its assessment of the economy, one of which was a change in the view of balancing inflation control and supporting the labor market. The statement noted, "The Committee believes that the risks to achieving employment and inflation goals are roughly balanced," which differs from the wording in September that expressed "greater confidence in this process."

Policy Recalibration

Federal Reserve officials believe that supporting employment is at least as important as controlling inflation, thus adjusting policy to a more accommodative stance.

The statement's description of the labor market was also slightly toned down, stating that "labor market conditions have generally eased, the unemployment rate has risen, but remains low." The Committee again mentioned that the economy is "continuing to grow steadily."

Federal Reserve officials interpreted the policy adjustment as an attempt to align the interest rate structure more closely with the current economic conditions, as inflation gradually returns to the Federal Reserve's 2% target, while signs of a slowdown in the labor market are emerging. Federal Reserve Chairman Jerome Powell has stated that the policy needs to be "recalibrated" to no longer be as tight as before, when the Federal Reserve was almost solely focused on curbing inflation.

As the macroeconomy continues to show strong growth and inflation issues still trouble American households, it remains uncertain how the Federal Reserve will adjust the magnitude of rate cuts in the future.

The GDP growth rate for the third quarter was 2.8%, slightly below expectations and lower than the second quarter level, but still above the historical average growth rate of 1.8%-2% in the U.S. According to the Atlanta Federal Reserve's forecast, growth for the fourth quarter is expected to be around 2.4%.

Overall, the labor market is performing well. However, non-farm employment only increased by 12,000 in October, partly attributed to storms and strikes in the Southeast.

This decision was also made against a backdrop of changing political circumstances. Newly elected President Donald Trump achieved a shocking victory in Tuesday's election. Economists generally expect that his policies may exacerbate inflation, especially his planned punitive tariffs and mass deportation of undocumented immigrants. During his first term, despite strong economic growth in the early pandemic, inflation remained low.

Trump has previously criticized Powell and his colleagues' work, and Powell's term is set to expire in early 2026. Although central bank officials avoid commenting on political matters, Trump's influence may affect future policies.

If economic activity accelerates under the Trump administration, the Federal Reserve may reduce the magnitude of rate cuts, depending on the response of inflation At a press conference on Thursday, Jerome Powell stated that the new government would not directly affect monetary policy. He emphasized that the upcoming election would not impact policy decisions in the short term and mentioned that he would not resign even if the elected president requested him to do so.

Future Rate Cuts

The question of the Federal Reserve's ultimate rate cut endpoint (i.e., the level at which interest rates neither stimulate nor suppress economic growth) has garnered widespread attention. According to CME Group's FedWatch tool, the market expects the Federal Reserve may cut rates by a quarter percentage point again in December, then pause in January to assess the impact of tightening policies.

Krishna Guha, Vice Chairman of Evercore ISI, stated, "We believe the overall statement indicates that the current policy path remains stable, and policymakers need time to digest the impact of Trump's economic policies, financial conditions, and market sentiment. A further rate cut in December may be a reasonable baseline expectation."

The Federal Reserve indicated in September that it expects to cut rates by another half percentage point by the end of this year and by another percentage point by 2025. The "dot plot" from September showed that Federal Reserve officials expect a terminal rate of 2.9%, which implies a further half percentage point cut by 2026.

Despite the Federal Reserve's rate cuts, market reactions have varied. Since the rate cut in September, both Treasury yields and mortgage rates have risen. According to Freddie Mac, the 30-year mortgage rate has risen to 6.8%, with the 10-year Treasury yield rising nearly in tandem.

The Federal Reserve is striving for a "soft landing" for the economy, aiming to reduce inflation while avoiding a recession. The Fed's preferred inflation measure shows a 12-month inflation rate of 2.1%, with core inflation, excluding food and energy, at 2.7%, which is generally considered a better long-term indicator