The Federal Reserve has voted to cut the federal funds rate range by 25 basis points, although the decision was not unanimous. Two policymakers dissented, with one advocating for no change and the other for a half-point cut. Federal Reserve Chairman Jerome Powell tempered expectations for a definitive outlook, stating that a further rate reduction at the December meeting is far from a certainty.
Strategists are now weighing in on the implications of this decision. Morgan Stanley noted that the Federal Open Market Committee (FOMC) statement retains an easing bias but highlighted the divisions within the committee. TD Securities suggests another rate cut is likely in December, pointing to the September Summary of Economic Projections, which indicated that most officials favoured two additional cuts by year-end. However, they cautioned that the growing divide among policymakers and the potential impact of a prolonged government shutdown could lead to a more cautious approach heading into next year.
Evercore ISI’s Krishna Guha observed that the Fed statement reflects the divergence between growth and labour market indicators. While growth was described as ‘moderate,’ the assessment of the labour market remained consistent with September. FWDBONDS’ Christopher Rupkey expressed concerns about shaky economic growth due to the government shutdown and job cuts. Rupkey stated that the Fed was right to move its slightly restrictive monetary policy setting closer to neutral. Capital Economics anticipates the Fed will cut again in December but expects solid GDP growth and a low unemployment rate to limit the extent of future rate cuts.
Comerica Bank forecasts the Fed to hold rates steady through May 15, the end of Jay Powell’s term as Fed chairman. Strategas Securities’ Don Rissmiller noted Powell’s acknowledgement of stable US economic conditions, but stated Powell wouldn’t commit to a December rate cut. Rissmiller believes the Fed’s goal is to move policy rates from modestly restrictive to neutral over time, targeting a 1 per cent real rate by 2026.
