On Wednesday, October 29, the Federal Open Market Committee (FOMC) of the Federal Reserve System (Fed) voted to reduce the benchmark interest rate by 25 basis points to a range of 3.75% to 4%. This is the second 25 basis points reduction this year. The first one took place at the September 17 meeting of the FOMC.
More information about the September action may be found HERE
The FMOC consists of the seven members of the Federal Reserve Board of Governors, the president of the New York Federal Reserve Bank, and four of the other eleven regional Federal Reserve Bank presidents.
Decisions by the FMOC are typically unanimous, but the two this year were not.
The October action was opposed by two members. Kansas City Fed President Jeffrey Schmid voted against the cut, preferring no change, while Fed Governor Stephen Miran advocated for a larger cut of 50 basis points.
Following the action of October 29, Federal Reserve Chairman Jerome Powell made the following comment, “In the near term, risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation.”
He was referring to the fact that the Federal Reserve System is tasked with two goals: Keep inflation in check, and encourage full employment. The action required to accomplish one of these goals is opposite to that required to accomplish the other, a “challenging situation” at best.
Chairman Powell went on to state that, “A further reduction in the policy rate at the December meeting is not a forgone conclusion—far from it”. This indicates a concern that further rate reductions may cause inflation to increase.
These remarks by Chairman Powell have introduced some uncertainty regarding what the Fed will do at the next FMOC meeting. If the current economic conditions continue into December, the Fed will be faced again with the tough decision of either keeping current interest rates to prevent further inflation or to reduce them to deal with a faltering job market.
At the consumer level, this latest action by the Fed has had little effect because the change has been anticipated at all levels. Consumer loan and saving account rates have been declining and stock values have been increasing. These are the typical reactions to interest rate reductions by the Fed.
As usual, the final decision on what to do about interest rates in December will depend on the state of the economy at the time the decision is made.
Be the first to comment