Fed Cuts Interest Rates Again, but Signals More Doubt Ahead

Forex - The Fed has once again lowered interest rates. It accepted a reduction of a quarter of a point but showed more signs of skepticism regarding how much and how quickly it would decrease rates in the future.

The latest reduction, approved by 11 of the Fed's 12 members, lowered the benchmark federal funds rate to a range of 4.25% to 4.5%, its lowest level in two years. Cleveland Fed President opposed the decision and voted to keep the rate unchanged.

The Fed had previously lowered rates in its last two meetings, starting with a half-point cut in September amid signs that the labor market might weaken. Officials approved a quarter-point cut last month.

In the policy statement following the Fed's FOMC meeting, it was stated, "Recent indicators suggest that economic activity continues to expand at a strong pace. Since the beginning of the year, labor market conditions have generally eased, and the unemployment rate has risen but remains low. Inflation, while progressing towards the Committee's 2% target, remains somewhat elevated. The Committee aims to achieve maximum employment and a 2% inflation rate over the long term. The risks to achieving employment and inflation goals are roughly balanced," it said.

The statement also indicated that the "magnitude and timing" of further adjustments would depend on the outlook, signaling a slower pace of cuts, stating, "In assessing the magnitude and timing of future adjustments to the target range for the federal funds rate, the Committee will carefully evaluate incoming data, the evolving outlook, and the balance of risks. The Committee will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities. The Committee has a strong commitment to supporting maximum employment and returning inflation to its 2% target."

In the FOMC statement, it was noted that while assessing the appropriate stance of monetary policy, the impact of incoming information on the economic outlook would continue to be monitored and "The Committee will be prepared to adjust the stance of monetary policy appropriately if risks emerge that may impede the attainment of its goals. The Committee's assessments will take into account a broad range of information, including labor market conditions, inflation pressures and inflation expectations, as well as financial and international developments."

Dean Maki, chief economist at the hedge fund Point72 Asset Management, stated, "Their approach towards neutral rate estimates is a significant reason why they might slow the pace of rate cuts going forward."

Alternatively, some economists suggested that policymakers would prefer to take a cautious approach to rate cuts early next year while awaiting to see if inflation continues to decline after two months of stronger-than-expected price pressures. The labor market appears to be somewhat stronger than officials anticipated when they began rate cuts in September.

Maki, however, noted that inflation-adjusted income growth has historically been robust and profit margins are near their highest levels in decades. "The economic ground is quite strong," he said.