At 2:00 AM Beijing time on October 30, the Federal Reserve announced its interest rate decision.
The Federal Open Market Committee (FOMC) decided by a vote of 10-2 to cut the interest rate range by 25 basis points to 3.75%-4.00%. Among the dissenting votes, Fed Governor Milan wanted a 50 basis point cut, while Kansas City Fed President Schmid favored holding rates steady. Fed Chairman Powell acknowledged significant internal divisions within the committee, and a December rate cut was not a certainty. As a result, US stocks plunged during trading, and international gold prices weakened.
Federal Reserve internal divisions
The resolution statement said that existing indicators suggest that economic activity has been expanding at a moderate pace. Job growth has slowed this year, and the unemployment rate has risen slightly, but remained low as of August; recent indicators are consistent with these findings. Inflation has risen since earlier this year and remains at a slightly high level.
At the start of the press conference, Federal Reserve Chairman Jerome Powell stated that data obtained before the government shutdown indicated that the trajectory of economic activity growth may have been slightly stronger than previously expected, primarily due to robust consumer spending.
Regarding the impact of the government shutdown, Powell believes its dampening effect on economic activity will persist, but these effects should gradually subside after the shutdown ends. The Congressional Budget Office (CBO) predicted on Wednesday that the month-long shutdown has already reduced U.S. GDP by at least $7 billion by the end of the month. CBO Director Phillip Swagel stated that if the shutdown continues, this economic loss will further increase.
Regarding the job market, Powell stated that current information points to a weakening labor market. "Although the official September jobs data was delayed, existing evidence suggests that layoffs and hiring activity remain at low levels; meanwhile, in this less vibrant and generally weak labor market, households' perception of job opportunities and businesses' perception of difficulty in recruiting are both declining. Downside risks to the job market appear to have increased in recent months. The Fed is closely monitoring layoff announcements. Many companies are discussing economic divergence. Low-income consumers are struggling, and there is indeed a possibility of a K-shaped economic recovery."
It is worth noting that earlier this week, Amazon On Wednesday, media giant Paramount announced it would lay off at least 1,000 employees across multiple departments, including CBS News. UPS also announced plans to cut 14,000 jobs company-wide. UPS announced it will lay off 48,000 employees this year. Last week, Target... Target announced it will cut 1,800 headquarters jobs, marking the company's first major layoff in a decade.
Powell stated, "Currently, a large number of companies are either announcing significant reductions in hiring or have already begun layoffs, and many of these companies cite artificial intelligence as a reason for their actions." (AI) and the role it can play. We are paying close attention to this.” He then stated that in data centers… Investment in artificial intelligence , particularly in the semiconductor industry, is also a significant driver of economic growth. A key difference between the current situation and the dot-com bubble era is that these highly valued companies today are actually supported by tangible profitability.
Regarding the price issue, Powell believes that if the impact of tariffs is excluded, the current inflation level is actually not far from the 2% target. "Fed estimates show that tariffs account for approximately 0.5 to 0.6 percentage points of the core personal consumption expenditures (PCE) price index. This means that if tariffs are excluded, the core PCE inflation rate would likely be in the range of 2.3% to 2.4%. The basic assessment regarding tariff-induced inflation is that this type of inflation has already occurred and may rise further, but it will be a one-off increase."
The Federal Reserve Chairman also addressed the divisions behind the vote, noting that members of the Federal Open Market Committee (FOMC), responsible for setting interest rate policy, have not reached a consensus on what the central bank should do next. Some members favor a pause in rate cuts, while others support further cuts. "During the committee discussions at this meeting, members were strongly divided on what to do in December. Whether the policy rate will be further lowered at the December meeting is not a done deal, far from it," he further explained. "In fact, we have now completed two more rate cuts. Regardless of the final neutral rate level, compared to a year ago, our current rate is 150 basis points closer to the neutral level. Now, there is a growing consensus that perhaps we should at least pause a policy cycle at our current level."
End quantitative tightening
The Federal Reserve decided in its policy statement to end quantitative easing (QT) on December 1. The committee also plans to adjust its investment portfolio structure—reducing maturing mortgage-backed securities… The principal and interest income from (MBS) are reinvested in short-term Treasury bills.
Quantitative tightening involves the Federal Reserve allowing a certain amount of its bonds to mature without being renewed. Theoretically, ending this process would alleviate downward pressure on market liquidity and potentially push money market interest rates down. To date, quantitative tightening has reduced the Fed's balance sheet from a peak of $9 trillion in 2022 to its current size of $6.6 trillion.
Since mid-month, the federal funds rate has been slowly rising along with overall money market interest rates. This change in market interest rates suggests to many Federal Reserve watchers that the quantitative tightening process may have withdrawn too much liquidity from the financial system. If liquidity is withdrawn excessively, the Federal Reserve may lose effective control over the federal funds rate—a situation that occurred during the previous round of quantitative tightening in September 2019.
What are the future policy prospects?
A recent private sector survey shows that despite the ongoing U.S. government shutdown, economic growth accelerated in October, and the Atlanta Fed’s GDPNow forecast for U.S. GDP growth this quarter has been revised upward to nearly 4%.
S&P Global The services PMI rose to 55.2 in October from 54.2 in September, a three-month high. The manufacturing PMI also edged up to 52.2 in October from 52.0 in September. However, businesses indicated that high tariffs are impacting exports, casting a shadow over the economy next year. Chris Williamson, S&P Global Chief Business Economist, stated, “The U.S. economy started the fourth quarter with strong growth momentum. However, business confidence in the outlook for next year has further declined, currently at one of its lowest levels in the past three years. Businesses are generally concerned about the impact of various policies, with tariffs being particularly prominent. Faced with weak demand and fierce competition,” businesses are finding it difficult to pass on costs to consumers. S&P stated that this situation helps to curb inflation.
The job market is precarious. Earlier this month, Challenger Gray Christmas, a global talent and career transformation company, stated that U.S. layoffs could exceed one million for the first time since 2020 by 2025. Meanwhile, automated data processing... A report from ADP shows that the U.S. private sector lost 32,000 jobs last month.
A survey by CBN reporters found that Wall Street generally believes the US economy is currently in a "wait-and-see" state, neither experiencing rapid growth nor significant weakening. Businesses are waiting for the tariff policies to settle before deciding whether to expand hiring or proceed with large-scale investment plans.
Federal funds rate futures pricing indicates that after Powell hinted at a possible pause in action in December, the market's expectation of a rate cut has fallen from 93% before the policy meeting to nearly 70%, and expectations for easing next year have also tightened.
In a report sent to CBN reporters, Michael Pearce, Deputy Chief Economist for the United States at Oxford Economics, stated that the rate cut decision was largely in line with expectations, but the unexpected hawkish dissenting vote indicates that the debate over future policy direction is intensifying. "Due to the lack of data caused by the government shutdown, there remains uncertainty regarding whether a rate cut will occur in December. We predict that the Federal Reserve will maintain interest rates unchanged in the coming months and complete three rate cuts at a frequency of one per quarter by 2026."
Goldman Sachs Alexandra Wilson-Elizondo, Global Co-Chief Investment Officer for Multi-Asset Solutions at Goldman Sachs Asset Management, said that a single, moderate inflation report, stable inflation expectations, and various rumors suggesting cooling labor demand all support a cautiously accommodative stance from the Federal Reserve. "If the current situation remains unchanged, there is a high probability of another 25 basis point rate cut at the December meeting," she added.
(Article source: CBN)
