The Federal Reserve plans to move ahead with its quarter-point rate cut next week, signaling a policy shift despite the upcoming elections and weak job numbers in October.
The central bank wants to steady the federal funds rate around 4.5%-4.75%, balancing concerns about inflation without compromising growth. This quarter-point cut also signals a return to the mild rate adjustment after September’s big cut.
However, the decision, set for two days after the election, could suffer complications due to the outcome of the presidential election. Fed officers have noted that the gradual easing is justified by the recent economic strength and a controlled inflation rate.
Federal Reserve reveals strategy to avoid economic slowdown
Despite a disappointing employment report in October, economic growth is still impressive, thanks to good consumer spending and a strong job market. GDP went up by 2.8% in Q3 on an annual basis. Although a decline from the previous growth rates, it still reflects a stable expansion.
Friday’s job report recorded the addition of 12,000 positions, the lowest since Joe Biden was elected as president. According to the Bureau of Labor Statistics, the figures were affected by the hurricanes in the South East and strikes at Boeing and other firms. Notably, the strike slashed 44,000 jobs from the payroll in October.
Most data analysts see the job data as a slight setback with no signs of sustained weakness. Fed officials want a neutral interest rate that won’t disturb economic growth. They are targeting a 2% inflation rate without severe job losses.
Key inflation metric, The personal consumption expenditure (PCE) dropped to 2.1% in September. However, the core PCE, closely monitored by the Federal Reserve is high at 2.7%. Over the last week, officials have talked about the need for small cuts and not the big cuts like in September.
Election uncertainty looms over Fed decision
The next Federal Reserve meeting is days after the United States elections, with officials wary about election-related turmoil. Top presidential candidates Kamala Harris and Donald Trump have discussed different economic approaches. This could reshape the outlook of inflation and growth.
Trump, in his campaign, said he would return protectionism trade policies, corporate taxes, and stringent immigration rules. He also pushed for more influence over the Fed, signaling that independence could be at risk. Meanwhile, Harris has been vocal about keeping the Fed independent and creating programs by taxing the wealthy.
Economists have frowned at Trump’s idea, noting that it could drive up inflation, while Harris’ will moderately impact the economy. However, the power in Congress will go a long way to determine how the approaches materialize.
Former president of Boston Fed Eric Rosengren said that Fed Chair Jay Powell is not expected to lay down a long-term policy at the next meeting. He noted that he will not give guidance if the outcome remains unknown. Meanwhile, the Fed’s approach has been cautious, with the body trying to safeguard stability. Election night tensions could affect the body’s decision-making, especially if the result remains unknown for days or weeks.
With rate cuts moving on gradually, the Fed wants to avoid aggressive moves except inflation goes up again. This strategy ensures space for more cuts if inflation eases and room for changes if it rises.