Fed cut interest rates by 25 basis points, here’s what Powell said

Jerome Powell on rate cuts: The Federal Reserve cut interest rates by a quarter of a percentage point on Thursday, as officials begin to evaluate the potential impact of President-elect Donald Trump’s incoming administration on the US economy. 

Fed Chair Jerome Powell stated that Tuesday’s election results, which secured the presidency for Trump—who has proposed extensive tax cuts, broad tariffs, and immigration restrictions—will have no immediate effect on monetary policy. Powell indicated the Fed will continue to rely on economic data to gauge the pace and eventual endpoint of interest rates, as it navigates a slowing inflation rate approaching the central bank’s 2 per cent target.

Powell acknowledged, however, that as Trump’s policies take shape, the Fed will assess their likely effects on its dual mandate of maintaining stable inflation and maximising employment. “It’s a process that takes some time,” Powell said in a press conference following the Fed’s decision to lower its benchmark rate to a range of 4.50 to 4.75 per cent. “With every administration, we examine all the policy changes and assess their cumulative impact on the economy.”

In recent years, President Joe Biden’s administration introduced significant infrastructure and spending legislation, which economists believe contributed to economic growth but also played a role in inflationary pressures, which the Fed countered with rapid rate hikes in 2022 and 2023. With inflation moderating, Fed rates are now decreasing, though Powell emphasised that the “neutral rate”—where policy neither stimulates nor restrains the economy—remains uncertain and could be further complicated by Trump’s promised fiscal and tax reforms, especially with the Republican Party’s control of the Senate and potentially the House of Representatives.

Despite past disagreements during Trump’s initial term, Powell, whom Trump appointed, will lead the Fed’s policy-making during the early period of the new administration. Trump has signalled he would let Powell serve until his term ends in May 2026, with Powell firmly stating that the law does not permit the president to remove the Fed chair over policy differences.

Looking ahead, both inflation and interest rates are declining, in line with the Fed’s outlook that inflation will continue easing amidst steady economic growth and a resilient job market. “The easy cuts have been made,” commented Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, noting that another quarter-point cut is likely at the Fed’s December meeting, although the market is awaiting clarity on how Trump’s policy agenda might influence the central bank’s approach.

Powell noted that, for now, the economic landscape and Fed policies are well-aligned, aiming to sustain a strong labour market and economic stability. “This recalibration of our stance supports economic strength and will help manage inflation as we move toward a neutral rate over time,” he said. “The economy, and our policies, are in a very good place.”

Following the Fed’s unanimous policy decision, Treasury yields reduced their losses and the yield curve flattened, with futures markets anticipating another quarter-point cut in December. The Fed’s statement noted that risks to inflation and employment remain “roughly balanced,” while acknowledging that inflation has “made progress” towards the Fed’s goals, rather than “further progress,” reflecting steady but slow inflationary movement.

Powell clarified that the language change does not imply inflation is stagnating but that the Fed expects a gradual path to the 2 per cent inflation target, adding confidence that inflation is progressing sustainably.

(With Reuters inputs)