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The Federal Reserve cut its benchmark interest rate by a quarter point on Thursday as its chair Jay Powell hailed the strength of the US economy and said he would not resign if incoming president Donald Trump asked him to.
The unanimous decision, two days after an election result that created fresh uncertainty about the outlook for the world’s largest economy, lowered the Fed’s target range to 4.5 per cent to 4.75 per cent. That marked a decline in the pace from September’s half-point cut, which rate-setters made to stave off weakness in the jobs market.
The Fed’s two-day meeting started on Wednesday, a day later than usual because of Tuesday’s US election, in which the Republicans trounced the Democrats.
Trump has proposed sweeping tariffs, mass deportations of immigrants and extensive deregulation in addition to lower taxes for the wealthy and businesses.
Stock markets have soared on expectations of bigger corporate profits, yet economists say the president-elect’s plans risk not only higher inflation, but also slower growth.
Powell refused to be drawn on how the central bank would respond to the next administration, saying it was too early to judge what the substance of a Trump government’s economic policies would be.
“We don’t guess, we don’t speculate and we don’t assume,” Powell said at his post-meeting press conference.
While the Fed is an independent institution, the president-elect lambasted rate-setters for not cutting borrowing costs swiftly enough during his first term.
Trump will have the opportunity to nominate a new chair once Powell’s term ends in May 2026.
Some of Trump’s advisers have called on him to ask Powell to step down early. When asked whether he would agree to do so, the Fed chair emphatically said “no”. He added curtly that it was “not permitted under the law” for a new administration to dismiss him ahead of the end of his term.
In addition to clinching the White House, Republicans captured the Senate and could hold a majority of seats in the House of Representatives too.
The S&P 500 continued its climb after the Fed’s decision, ending the day up 0.7 per cent. The index has gained more than 4.2 per cent on the week, putting it on course for its best week in a year.
The policy-sensitive two-year yield on US Treasuries fell more than 0.06 percentage points to 4.197 per cent after the announcement, while the benchmark 10-year yield was down nearly 0.1 percentage points at 4.33 per cent. The moves marked a partial reversal of a sharp rise in the government’s cost of borrowing a day earlier, as bonds sold off following Trump’s victory.
The president-elect’s plans to roll over tax cuts made during his first term have raised concerns over the size of the US deficit. Powell said the Fed would take “material” and “persistent” changes in the US government’s borrowing costs “into account”.
The Federal Open Market Committee on Thursday said the economy was expanding at a “solid pace” even as labour market conditions had “generally eased” compared with earlier in the year.
The FOMC continued to characterise inflation as “somewhat elevated”, affirming that the risks to achieving both low, stable inflation and a healthy jobs market were “roughly in balance”.
Fed officials are debating how quickly to lower interest rates to a “neutral” setting that neither boosts nor suppresses demand, while keeping inflation steady at the central bank’s 2 per cent goal.
Powell stressed the economic health of the US meant the right way for rate-setters to get to neutral was “carefully” and “patiently”.
“Nothing in the economic data suggests that the committee has any need to be in a hurry to get there,” he told reporters. “We are seeing strong economic activity. We are seeing ongoing strength in the labour market.”
He said that as interest rates closed in on neutral, it might be “appropriate” for the Fed to slow the pace of its rate reductions.
Matthew Luzzetti, chief US economist at Deutsche Bank, took that as Powell beginning to “set up the case for skipping a meeting or pausing rate cuts at some point in time”.
Jonathan Pingle, chief US economist at UBS, said he expects the Fed to deliver another quarter-point cut in December before skipping a rate reduction at the January meeting.
“I can make a case for the data derailing the December rate cut, but that’s not the message we got from Powell today,” he said.
Inflation has fallen dramatically since peaking at about 7 per cent and is now close to 2 per cent. The labour market has cooled but stayed solid — defying expectations of a more substantive slowdown.
Economists said October’s jobs report, which showed employment growing by just 12,000 positions, was an aberration, reflecting distortions stemming from two hurricanes and labour strikes.
The Fed has opted against providing specific guidance about what will happen to rates next — saying it will act on the data.
Additional reporting by Harriet Clarfelt in New York