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The Federal Reserve cut interest rates by a quarter point on Thursday, following the U.S. presidential election earlier this week. This reduction, from 4.75 percent to 4.5 percent, marks the first announcement following Tuesday's election and the re-election of Donald Trump.
It’s the second rate cut since the central bank began lowering borrowing costs in September, though this latest cut is smaller. Still, it provides Americans with further relief from the high cost of loans like credit cards, auto loans, and mortgages.
In a statement from the Federal Open Market Committee (FOMC), it was noted that "Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated."
The Federal Reserve is closely monitoring both inflation and the job market, with officials noting that the risks of a weakening job market and rising inflation are now balanced. However, the focus has recently shifted toward the labor market, which, although still relatively healthy, has shown signs of slowing. In September, job openings dropped to 7.4 million from 9.3 million a year prior, and the hiring rate decreased to 3.5% from 3.7%. The unemployment rate rose to 4.1% in October, up from 3.8% a year ago, and continued claims for unemployment benefits reached their highest level since November 2021, suggesting it is now more challenging for job seekers to secure employment.
As a reminder, the Federal Reserve and the FOMC board are independent from the White House and do not need approval when announcing rate changes, maintaining a level of independence. However, policymakers will need to consider how a Trump presidency might influence the economic outlook in the months and years ahead, as it could impact their two official goals: maintaining slow and stable inflation and a strong labor market. The Fed has been making progress toward these targets in recent months.
Following Tuesday’s election, the stock market saw a dramatic rise, particularly in stocks such as Tesla, whose CEO, Elon Musk, was a highly vocal and visible supporter of President Donald Trump’s re-election. Significant gains were also seen in stocks related to crypto and AI, along with an increase in the price of Bitcoin, as the President-elect promised policy changes in thoes areas.
In a press conference following the announcement, Fed Chairman Jerome Powell stated, "Our colleagues and I remain squarely focused on maintaining our dual goals of stable price increases and stable employment for the benefit of the American people. The economy is strong overall and has made significant progress toward our goals over the past two years. The labor market has cooled but remains solid. Inflation has been reduced from seven percent to two point one percent, and we remain focused on our two percent inflation goal."
He continued, "We believe that strength in the economy and in the labor market can be maintained, with inflation moving sustainably down to 2 percent. Recent indicators show that the economy is continuing to expand at a solid pace. The GDP rose at an annual rate of two point eight percent over the previous quarter, the same pace as the second quarter. Consumer spending remains strong, but performance in the housing market remains weak."
On the labor market, the Chairman remarked that while the employment rate has risen since last year, the recent struggles could be due to labor strikes and recent hurricanes that have affected several states. Chairman Powell offered his sympathies to those affected by the hurricanes. He also remarked that the labor market is not a source of significant inflation pressures.
On inflation, Chairman Powell stated that "inflation has reduced significantly over the past two years, except in the volatile food and energy sectors." He continued, saying that "core inflation remains somewhat elevated."
Regarding the uncertainty of policies in the near future, Chairman Powell noted that "the Committee is well-suited to adjusting policy to pursue its dual mandates of keeping inflation sustainably down and ensuring a strong labor market. We understand how our actions affect everyday Americans and remain focused on the best outcome for the American people."
In the near future, and with the recent election, the most pressing concern for the Federal Reserve regarding inflation and the overall economy would be the promised introduction of widespread tariffs, particularly on China, as promised by President-elect Trump. Additionally, there is the possibility of dismissing various regulatory officials to be replaced by those aligned with the incoming President’s ideology.
President-elect Trump has directly promised to dismiss SEC Chairman Gary Gensler and has expressed dissatisfaction with Fed Chair Powell's performance during his previous administration, as Powell did not change policy to suit the former President's preferences.