At the November meeting, the Federal Reserve (Fed) highlighted a gradual approach to lowering interest rates, supported by stronger-than-expected economic growth and a stable labor market, according to recently released minutes.
This change reflects a less urgent stance to reach “neutral” rate levels that do not limit growth, after a significant half-point cut in September.
Gradual cuts and data monitoring
At its last meeting, the Federal Open Market Committee (FOMC) reduced rates by a quarter point, placing them in a range of 4.5-4.75%. This was the second consecutive cut, and another similar move is anticipated in December, although officials stressed that their decision will depend on upcoming economic data.
Fed Chair Jerome Powell highlighted that while inflation has slowed significantly from its 2022 peak, it still remains above the 2% target. This situation requires caution in the rate of rate reduction.
Inflation, employment and geopolitical risks
The minutes reflect an optimistic outlook on the labor market, with no signs of rapid deterioration, offering respite from earlier concerns. However, some FOMC members warned that inflation could take longer to moderate due to geopolitical risks and potential disruptions to supply chains.
The recent consumer price index (CPI) showed a 2.6% year-on-year increase, driven by a 0.2% monthly increase. This indicates that, although inflation is under control, it has not disappeared as a risk factor.
December markets and expectations
The futures market reflects moderate support for a new cut in December. Minneapolis Fed President Neel Kashkari called the possibility of further tapering “reasonable,” while the Chicago Fed’s Austan Goolsbee backed the move.
In response to the minutes, the yield on the Fed’s policy-sensitive two-year Treasury bond fell to 4.25%, marking a weekly low. For their part, the S&P 500 and the Nasdaq Composite closed with increases of 0.6%, showing optimism in the markets.
Conclusion
The Fed maintains a balanced approach, adjusting interest rates carefully to manage inflation while supporting economic growth. As the last meeting of the year approaches, attention will turn to how economic data will influence its decision and the impact of a crypto-friendly administration on financial markets.
This strategy not only underscores the importance of stabilizing the economy, but also the Fed’s ability to adapt to a changing landscape of risks and opportunities.
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