The Fed’s new easing cycle continued last week, as they cut their benchmark Federal Funds Rate by 25 basis points, bringing itto a new range of 4.5% to 4.75%. This decision was unanimous and followed the 50-basis point cut the Fed made in September(which brought one dissent).
Note that when the Fed cuts rates, they are reducing the Fed Funds Rate, which is not mortgage rates or even a long-term rate.The Fed Funds Rate is a very short-term rate, literally a rate that’s only good overnight. Banks use this as the rate that they lendmoney to one another, but it is the building block for all interest rates.
What’s the bottom line?
The Fed’s decision to cut an additional 25 basis points instead of pausing shows their continuedconfidence that their dual mandate of price stability and maximum employment is in balance. In his press conference following the meeting, Fed Chair Jerome Powell addressed concerns that the progress to tame inflationhas stalled. While the latest Core Personal Consumption Expenditures (PCE) showed annual inflation was at 2.7% as ofSeptember, Powell noted that if we annualized the last three and six months of readings, Core PCE would be 2.32% and 2.28%respectively, which is closer to the Fed’s 2% target and in line with what the Fed wants to see. While Powell did not commit to any specific actions at the Fed’s next meeting on December 18, investors are still expectinganother 25-basis point cut at that time, with a pause coming at their meeting on January 29. However, expectations may change,in either direction, as economic data presents itself.