The Fed cuts again

The Fed cut its key interest rate by 0.25 of a percentage point after the Federal Open Market Committee (FOMC) meeting that ended November 7, in a move that was widely expected by investors and markets. This rate cut brings the target for the federal funds rate to a range of 4.50% to 4.75%.

Although investors generally expect that more rate cuts may be coming from the Fed in the next year, recent jobs-market data has cast some doubt over how many times the Fed may cut, and how steep each cut may be.

Read on for 3 takeaways from the Fed’s latest meeting.

1. What has changed since the last meeting

The Fed’s previous meeting came just weeks after a surprise increase in unemployment, which had rapidly shifted the central bank’s focus further toward supporting the labor market. (The Fed has a “dual mandate” of keeping inflation low and stable, but also of keeping unemployment low; a key part of its role is to balance these objectives.) That surprise increase in unemployment, plus other relatively weaker data releases on jobs, likely contributed to the Fed’s decision in September to go with a larger half-a-percentage-point cut.

However, since the September meeting, the jobs market has shown greater stability rather than deteriorating as some had feared. From its July high of 4.3%, the unemployment rate has declined and stayed at 4.1%, even after the impact of job losses from the recent hurricane season.¹

At the same time, headline measures of inflation have generally continued to make progress toward the Fed’s goal of 2%—although there has been some stickiness under the surface. The year-over-year change in the Consumer Price Index, or CPI, fell to 2.4% in its most recent reading—its lowest level in more than 3 years.² The annual inflation rate as measured by the Personal Consumption Expenditures (PCE) Price Index fell to 2.1% in its most recent reading.³ However, core PCE inflation, the Fed’s preferred less-volatile measure, has been slightly stickier and remained at a steady 2.7% in the past few months.⁴ Inflation in the cost of shelter, or rent, has shown particular stickiness.

2. Where rates may go from here

Even after this rate cut, interest rates are still high enough to be considered “restrictive,” meaning they’re effectively putting the brakes on the economy.

The Fed has sent consistent signals in recent weeks and months that it wants to gradually take its foot off the brakes and move closer toward a “neutral” stance—which would mean setting its interest rate at a level that neither accelerates nor slows the economy. For this reason it’s likely that a few more interest-rate cuts may be coming. While there appear to be good chances of another rate cut at the Fed's December meeting it's not a certainty at this point, due to the steady-looking jobs market and sticky core inflation.

The central bank will release an updated set of economic projections at its next meeting, including a freshly revised dot plot—a key chart that shows how FOMC members believe rates may evolve in the coming years.

3. Timing of the Fed's decision

While some media reports may raise questions about the timing of the meeting and the rate cut so close after Election Day, the Fed itself has consistently and repeatedly stressed that political considerations do not factor into its decision-making (the exact dates of its meetings are typically set years in advance).

“We do our work to serve all Americans,” Chair Powell said at the FOMC’s September press conference. “We’re not serving any politician, any political figure, any cause, any issue, nothing. It’s just maximum employment and price stability on behalf of all Americans.”