The US Federal Reserve’s Federal Open Market Committee (FOMC) has voted to cut rates by 25 basis points to 3.75-4% and announced an end to quantitative tightening.
Yet markets remain uncertain about the timing of the next move after chair Jerome Powell signalled a more measured stance.
The vast majority (10) of members voted in favour of the rate cut and end of quantitative tightening from 1 December, with two dissenting – one voting for no change in the policy rate and the other pushing for a 50-basis-point reduction.
The latest decision was helped along by inflation missing expectations in September, which was at 3% year-over-year – still above the Fed’s 2% target but lower than had been predicted.
Jean Boivin, head of the BlackRock Investment Institute, said: “The Fed reaffirmed that a softening labour market remains key. This fits with our view in September that a softening labour market helping to bring down inflation would allow the Fed to cut rates – and why we stuck with our pro-risk stance.”
While private sector indicators and US state jobless claims have pointed to a further softening, Boivin said this does not illustrate a “sharp deterioration that would stoke worries about a sharper slowdown”.
However, with missing economic data due to the continued government shutdown and Powell’s warning that further cuts this year are not a foregone conclusion, the implied probability of a December rate cut has fallen from 92% at close on 28 October to around 67%, according to Bloomberg data.
Nonetheless, Boivin still expects the Fed to cut rates again at the end of this year.
“We find it noteworthy that the Fed is downplaying any potential froth in risk-taking and how lower interest rates might be playing a role,” he added.
“The Fed is cutting rates into a stock market pushing to all-time highs while inflation still remains above target and doesn’t feel any need to acknowledge some risks. This suggests that loose financial conditions won’t stop it from cutting rates soon.”
As such, he said the institute maintains a pro-risk stance.
Nicolas Sopel, head of macro research and chief strategist at Quintet Private Bank, also expects the Fed to cut interest rates again in December to 3.5-3.75%.
Meanwhile, George Lagarias, chief economist at Forvis Mazars, said that markets “overplayed their bets on just how much weak employment and a pressing White House would affect the central bank’s stance on inflation”.
“It is only natural that the Fed’s chair would pour cold water on expectations for a series of rate cuts going forward,” he said.
He added that investors should celebrate the Fed’s continued affirmation of its independence, with one member even going so far as to vote against the rate cut altogether.
“An independent central bank is more likely to have a grip on inflation and would have more credibility if it needed to intervene in case the artificial intelligence-driven equity market retrenches significantly,” said Lagarias.
It is nonetheless important to note that the US government shutdown is nearing its one-month mark, with central bankers left flying blind about the job market.