Key takeaways
The U.S. Federal Reserve (Fed) cut interest rates by 0.25% to a range of 4.50%-4.75% to gradually normalize policy as inflationary pressures ease.
The Fed’s rate cut today continued its trajectory of lower policy rates after a 0.50% reduction at its previous meeting.
Chairman Jerome Powell set the stage for additional rate cuts in coming months, referring to the economy as strong and noting progress on slowing inflation.
The Federal Reserve cut its target federal funds interest rate by 0.25% to a target range of 4.50% to 4.75% following its regularly scheduled two-day meeting. Economists and investors anticipated the incremental shift lower in rates after last meeting’s 0.50% reduction, with interest rate markets pricing in 0.75% to 1.00% of additional rate cuts by the end of 2025. Stronger economic data and an improving economic growth outlook has moderated previously more aggressive rate cut expectations. Normalizing economic conditions, and moderating inflation in particular, remain the key catalysts for managing policy rates down to more normal levels. The Fed uses interest rate policy to carry out its maximum employment, price stability and moderate long-term interest rate mandates.
Some investors and members of the media wondered whether the presidential election results will impact the Fed’s policy decisions. Chairman Jerome Powell addressed this during the press conference. He said, “The election will have no effects on our policy decisions … In principle, it's possible that any administration's policies or policies put in place by Congress could have economic effects that over time would matter for our pursuit of our dual mandate goals. So along with countless other factors, forecasts of those economic effects would be included in our models of the economy and would be taken into account through that channel.
In addition to the election having no imminent impact on policy decisions, it is also unlikely to impact the near-term makeup or structure of the Federal Reserve. Politicians on both sides of the political spectrum have criticized Fed chairs from time to time, including President-elect Donald Trump. However, Powell’s term does not end until 2026, and today he said he would remain at his post until then. Presidents do not have the legal ability to remove Fed chairs and have limited influence over the structure of the Fed. As such, we do not anticipate any material changes to Fed leadership in the near term.
Despite recent rate cuts, current monetary policy likely remains restrictive. Powell stated, “We’re in the process of moving policy rates down to a more neutral level.” Economists and the Fed refer to neutral interest rates as a level that neither artificially boosts nor hinders economic activity. Powell acknowledges current interest rate levels modestly drag on activity, even after today’s rate cut. Aggressive policy tightening in the form of rate hikes between early 2022 to mid-2023 helped drive the Core Personal Consumption Expenditures Price Index (Core PCE), the Fed’s preferred inflation gauge, from a peak above 5.5% year-over-year in 2022 to 2.6% in September. The headline Consumer Price Index, another widely followed inflation measure, has decelerated from a high of 9.1% in 2022 to 2.4% in September.
The Fed is currently allowing to runoff, or mature without replacement, up to $25 billion per month in Treasuries and $35 billion per month of mortgage bonds from their inventory. This reflects a drop from the previous pace of $60 billion per month in Treasuries as of June. Many anticipate this runoff should decelerate further or cease altogether in the first half of 2025. Slower or no balance sheet runoff improves market liquidity, which refers to the amount of money readily available to buy goods, services and financial assets in an economy. Shorter-term liquidity measures modestly improved in the last month and should remain constructive into early 2025. The Treasury Department’s cash balances remain elevated and near target balances, meaning there is ample cash awaiting deployment via government spending, which can boost liquidity in the near term.
Stock prices added to Wednesday’s post-election gains before the Fed’s announcement and continued rising afterward, due to no meaningful surprises in the announcement or press conference. Treasury bond yields had begun falling today before the Fed’s announcement, reversing a portion of the previous day’s move. Yields continued trending slightly lower post-announcement. Large company stocks, represented by the S&P 500, rose 0.7% while small stocks fell slightly after the previous day’s large increase on election results. Ten-year Treasury bond yields fell 0.1% to 4.33% today, while two-year Treasury yields fell 0.06% to 4.2%.
Monetary policy, defined as central bank target interest rates, remains restrictive in most geographies around the globe. However, policy has begun gradually easing; as central bank rate cuts exceeded hikes starting in the fourth quarter of 2023 as inflation began trending lower. Investors anticipate modest interest rate cuts from other major central banks in addition to the Fed.
We retain a constructive outlook for diversified portfolios due to still-solid corporate profits, an improving economic growth trajectory, lower inflationary pressures and easing monetary conditions while acknowledging the labor market is easing somewhat. Robust consumer and business activity translated into stronger-than-expected economic data, and consensus economist forecasts call for a smooth and slower trajectory of real (inflation-adjusted) growth settling near 2% in coming quarters. In aggregate, consumer activity remains near normal historical levels, driven disproportionately by wealthier cohorts. Moderating inflation trends remain clear despite stimulative fiscal policy in the form of deficit spending amid increasing government debt. We will keep you informed of our views as incremental data becomes available and as we update our assessment of market conditions.
This information represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. It is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).
U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
Declining – yet persistently elevated – prices continue to weigh on consumers and policymakers alike.
The Federal Reserve cut interest rates in September for the first time since 2020.
Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.
