Unsurprisingly, the FOMC made clear it was too early to assess the economic implications of this week’s US election. Activity and prices meanwhile justify a gradual withdrawal of policy tightness.
The US FOMC delivered a 25bp cut at its November meeting as expected, taking the mid-point of the fed funds range to 4.625%. Overall, the Committee’s view on the outlook remains constructive. Labour market conditions “have generally eased, and the unemployment rate has moved up” but it “remains low”. Economic activity has also “continued to expand at a solid pace”. On inflation, progress has been made towards “the Committee’s 2 percent objective though [it still] remains somewhat elevated.”
Risks to the outlook are seen as being “roughly in balance”; however, the Committee made clear they intend to continue “carefully assess[ing] incoming data, the evolving outlook, and the balance of risks”. Clearly it is too early to assess, let alone react to, the policy/ economic developments that may ensue from this week’s US election – more below.
In the press conference, Chair Powell reiterated the statement’s key messages, in particular noting that the labour market is now less tight than it was prior to the pandemic despite continued job gains. The labour market is consequently not seen as a concern for inflation, while supply across the economy is also assessed to have improved over the past year. These developments allow the FOMC to reduce their restrictiveness at a measured pace even as GDP growth remains above trend.
On this week’s election specifically, Chair Powell made clear that, in the near term, the outcome will have no effect on monetary policy. It is only over time, as policy is committed to and implemented, that the economic implications become clear and any monetary policy response can be decided upon. The December FOMC meeting will be the first opportunity for Committee members to update their forecasts; however, this will be more than a month before even inauguration takes place, let alone when the President-elect and new Congress begin to debate policy.
Regarding financial conditions, while assessed continually, for monetary policy it is the materiality and persistence of any change that matters. Reading between the lines of Chair Powell’s remarks, with several points of uncertainty affecting markets and the economy, it is too early to assess the sustainability, let alone the consequences, of recent fluctuations in interest rates and equity prices.
A few comments were also made in response to questions on inflation’s progress to target. Chair Powell was clear that non-housing services inflation and goods inflation were currently consistent with headline inflation at target. Further, housing inflation was being held up by past agreements not current market dynamics, with rent increases agreed for new contracts instead negligible. A continuation of these trends will see headline inflation sustainably at target within the forecast horizon, particularly given the labour market is not currently inflationary and is susceptible to softening further.
All told, the FOMC is mindful of evolving risks, but feels justified to continue reducing the restrictiveness of monetary policy at a measured pace into 2025. Arguably their net assessment of economic risks is now modestly skewed down given the confidence the Committee have in the inflation outlook and reason for caution over labour market momentum. We see these views as consistent with our forecast for 25bp rate cuts at the December, January and March meetings, followed by one cut per quarter to September 2025. That would leave the fed funds rate at 3.375%, modestly above the FOMC’s longer-run neutral rate forecast of 2.9% but broadly in line with our own view of this metric. Inflationary risks related to this week’s election are instead likely to become apparent in late-2025 and 2026, assuming policy mooted by President-elect Trump is passed and implemented.
