The Federal Reserve (Fed) lowered interest rates by 0.25% to a range of 4.5% - 4.75%.  Markets were expecting today’s move as well as several additional moves over the course of the next year.  Monetary policy took a backseat to U.S. elections and the implications for fiscal policy this week.  Chair Powell noted that it was too soon to incorporate the election outcome into the Fed’s economic models or policy decisions.

Current Conditions – The economy is growing at a solid pace, but job growth has eased from earlier in the year.  The Fed’s preferred measure of inflation stood at 2.7% through September and the pace of deceleration has slowed over the last several months.  Powell noted the downside risks to growth seem to have diminished since the Fed’s September meeting.  Powell interprets the recent increase in Treasury yields as a result of higher growth expectations rather than an increase in inflation expectations.  

Forward Guidance – Powell insisted the Fed was not on a preset course of rate cuts and would wait to see additional data before deciding to cut again in December.  The Fed sees the risks of higher inflation and weaker employment as roughly in balance.  The Fed removed a comment from the September statement regarding its confidence in the trajectory of inflation toward 2%.  Powell saw “greater confidence” in the reduction of inflation as a prerequisite for the first cut, and not something they would repeat with every meeting.

Policy/Market Reaction – Today’s move was unanimously approved by the Committee.  The Fed’s release and Powell’s press conference did not explicitly guarantee a December rate cut.  Markets have dialed back the implied probability of a December cut from 82% last week to 67% following the election and today’s release.  The Fed’s statement and Powell’s comments did little to derail recent momentum in financial markets. 

Gary Pzegeo, CFA  joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.