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The Fed unanimously voted to cut the benchmark rate by 25 basis points to a target range of 4.50% - 4.75%. According to Federal Reserve Chair Jerome Powell, the move was the second step in the Fed’s recalibration of monetary policy (the first step being September’s rate cut). The press release following the two-day meeting stated that “labor market conditions have generally eased …unemployment has moved up but remains low … and inflation has made progress towards the committee’s 2% objective but remains somewhat elevated.” The Fed continues to believe the risks to achieving its two goals “are roughly in balance” and will continue to make meeting-by-meeting assessments of the economy. Powell told reporters the committee is not in a hurry to get to a neutral rate but would rather take its time to be sure they get it right. They want to be in a position to move more quickly in cutting rates if the labor market deteriorates but also have the ability to slow down cuts if inflation begins to rise.
Powell made it very clear on several occasions that he would not address anything related to the incoming administration. When asked if he would resign or leave before his term is up, Powell’s answer was short and to the point, “No.” As for why Treasury yields have risen so much and if that concerned the Fed, Powell attributed the rise to the anticipation of stronger economic growth and not to inflation. Powell does not believe the rise in yields is a major factor at this time.
The odds for another rate cut are a little greater than they were earlier in the week, but as Powell said, it all depends on incoming data. There will be one more job report and two more rounds of inflation data before the next FOMC rate decision on December 18.
KEY INDICATORS THIS WEEK
The Election and the Market – The elections are over and finalized. Now comes the task of understanding how President-elect Donald Trump’s gameplan will impact the financial markets and the economy. The immediate reactions drove the key stock indices to new record highs with the best one-day gain in two years, while sending bond yields surging to the highest levels since July. Stocks rallied on prospects that Trump’s agenda will grow the economy and boost corporate earnings with low taxes. On the other side, bond yields rose over concern that Trump’s plans for greater spending and lower taxes will cause inflation to rise and increase the federal deficit. The markets’ moves seem to suggest it may not be possible to have our cake and eat it too without some indigestion. I don’t think it will be as easy as taking a couple of Tums to find the appropriate balance that will keep the economy moving along while easing price pressures.
NOTE: Behind the Numbers will not be published next week. The report will resume on November 22.
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