The Fed’s major decision comes less than two months before an election that will pit Democrat Kamala Harris against Republican Donald Trump. Fed interest rates are now in the 4.75% to 5.00% range after being held at 5.25% to 5.50% for more than a year, the highest level since the beginning of the century.
“This decision reflects our growing confidence that labor market strength can be maintained with appropriate readjustment of our policy,” Federal Reserve Chairman Jerome Powell said at a news conference.
The decision was not unanimous by the Fed’s monetary policy committee (FOMC): One governor, Michelle Bowman, voted for only a quarter-point cut.
More cuts are expected as Fed officials plan to cut rates by another half-point in total by the end of 2024. Jerome Powell said this was “the beginning of a process” of changing monetary policy.
Fed independence
This reduction in interest rates will restore purchasing power to American households that have been stuck between high inflation and high credit costs for several years. Although the Fed is independent of political power, its decision may be supported by Kamala Harris.
Jerome Powell assured that the central bank’s decisions were not politically motivated: “We ask ourselves: What is the right thing to do for the people we serve? And that’s what we’re doing […]. It’s never about anything else. Nothing else is discussed. »
Republican candidate Donald Trump, who has been toying with the idea of reducing the Fed’s independence, decided at a meeting in Flint (Michigan) on Tuesday that a rate cut would only be possible “because the economy is not good.” He promised to “lower rates even further” if elected.
“We serve no politician, no political figure, no cause, no issue, nothing,” Jerome Powell said when asked about a possible challenge to the Fed’s independence.
“This is simply about maximum employment and price stability for all Americans. [la double mission de la Fed, NDLR]”This is the way other central banks are organized. It’s a good institutional arrangement that is in the public interest,” he added.
“Balanced” risks
Fed officials also revised down their inflation forecast to 2.1% for 2025 at their meeting on Wednesday, down from 2.3% in the previous estimate released in June. The unemployment rate was revised upward to 4.4% this year and next year, down from previous estimates of 4.0% and 4.2%. Gross domestic product (GDP) growth for 2024 is expected to be 2.0%, down from 2.1% previously.
Now that inflation is slowly returning to normal, the Fed wants to keep unemployment from rising by lowering rates. The FOMC emphasized that the “risks” associated with the Fed’s two missions — full employment and price stability — are now “roughly balanced.”
In late August, Jerome Powell warned that “it’s time” to ease monetary policy. In fact, the employment situation had been sidelined by Fed officials because the U.S. labor market had been in such good shape in recent years.
As for inflation, the slowdown in the US continued. The PCE index, which the Fed wants to lower to 2%, remained stable at 2.5% for a year in July. August data will be released on September 27. The CPI index fell to 2.5% in August, its lowest level since February 2021. The unemployment rate fell to 4.2% in August, but job creation is slowing.
