Federal Reserve Chair Jerome Powell said this Thursday (7) that, for now, the North American central bank is not taking into account the results of this week’s elections in its monetary policy choices. The Fed decided this Thursday to reduce interest rates by a quarter of a percentage point, or 0.25 pp
“In the short term, the election will have no effect on our monetary policy decisions,” Powell said after a Fed meeting that resulted in an expected rate cut. “We don’t guess, we don’t speculate and we don’t assume” what the government’s future political choices will be, Powell added after former president Donald Trump was elected on a potentially inflationary and deficit platform.
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Powell also ruled out resigning from his position, even if requested by the president-elect. When asked, Powell briskly responded, “No.” He also said that the removal or demotion of any Fed board leader, including himself, “is not permitted by law.”
The Fed’s decision
Fed officials unanimously cut the federal funds rate to a range of 4.5% to 4.75%. The second consecutive rate cut followed a larger half-point reduction in September, expanding efforts to keep the US economic expansion on a solid footing.
“This further recalibration of our policy stance will help maintain the strength of the economy and labor market and will continue to enable greater progress on inflation as we move toward a more neutral stance over time,” Powell said.
His comments came after the re-election this week of Trump, who has a history of publicly criticizing the Fed chairman and explored the possibility of firing Powell during his first term in the White House. Trump has also promised to implement more aggressive tariffs, crack down on immigration and extend tax cuts — policies that could put upward pressure on prices and long-term interest rates and prompt the Fed to scale back rate cuts.
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“We don’t know what the timing and substance of any policy change will be,” Powell said. “Therefore, we do not know what the effects on the economy would be, specifically whether and to what extent these policies would be important for achieving our target variables: maximum employment and price stability.”
The fight to tame inflation
The Federal Open Market Committee said it continued to view the risks to achieving its employment and inflation goals as “more or less balanced” in a statement released Thursday. “The economic outlook is uncertain, and the committee is mindful of the risks on both sides of its dual mandate.”
Policymakers no longer included a line about gaining “greater confidence” that inflation is moving sustainably toward 2%, although they noted that inflation has “progressed” toward the central bank’s target.
The committee also slightly modified its language on the labor market.
“Since the beginning of the year, labor market conditions have generally softened, and the unemployment rate has risen but remains low,” the Fed statement said. Powell described the job market as “solid.”
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After kicking off the Fed’s easing cycle with a major interest rate adjustment, policymakers have said they favor a more measured and careful approach to rate cuts going forward. Powell reiterated that policymakers are in no rush to reduce borrowing costs.
Robust economy
The U.S. economy advanced at an annual rate of 2.8% in the third quarter, driven by a rise in consumer spending. Concerns about the imminent weakening of the job market have also diminished, but the data still points to a cooling trend.
US employers created just 12,000 in October – constrained by severe weather and a major strike – and numbers from previous months were revised downward.
Inflation has declined substantially in recent years, but progress has been unstable.
Year-on-year, the rate of price increases slowed to 2.1% in September, slightly above the central bank’s 2% target. Meanwhile, the Fed’s preferred gauge of underlying inflation posted its biggest monthly gain since April.
Traders considered a quarter-point cut on Thursday to be almost certain. Futures markets show a high probability of another similar-sized cut in December.
Treasury yields rose rapidly in the run-up to the election, pushing up mortgage rates in an already sluggish housing market. The S&P 500 hit a record high after Trump’s victory.
Powell said the Fed was paying attention to rising long-term bond yields and attributed it to the perception of stronger growth. He also said bond rates would have to remain elevated before the central bank could make a conclusive assessment on their economic impact.
*With information from Reuters and Bloomberg
