On Wednesday, the Federal Reserve approved a quarter-point decrease in interest rates, marking the third consecutive cut since the monetary easing began in September.
This decision lowers the Fed’s benchmark rate to between 3.50% and 3.75%. Additionally, the Fed stated it would reduce the interest it pays banks on reserves to 3.65%.
“Current indicators point to a moderate expansion in economic activity,” the Fed mentioned in its announcement. “Job growth has slowed this year, and there’s been a slight uptick in the unemployment rate through September. Recent indicators align with these patterns. Inflation has increased since the year’s start and continues to remain somewhat elevated.”
Among the voting officials in the Federal Reserve’s monetary policy committee, nine out of twelve were in favor of the quarter-point reduction. Fed Director Steven Milan, who previously served as a senior adviser at the White House, opposed this move, advocating instead for a more significant cut of 0.5 percentage points. This meeting marks his third dissent in favor of a half-point reduction when the Fed has opted for a quarter-point cut.
Chicago Fed President Austan Goolsby and Kansas City Fed President Jeffrey Schmidt also disagreed, supporting a decision to keep the target rate unchanged. Notably, this is the first instance since 2019 that three officials have voiced differing opinions during a single meeting.
The forecasts from Fed officials shared on Wednesday highlighted significant divisions concerning interest rates over the next year. Three officials anticipate that the recent rate cut will be reversed by the end of next year. For next year, no further cuts are predicted, although four anticipate a possibility, while four expect one cut and another four foresee two cuts. Additionally, two officials have projected three cuts, one foresees four cuts, and one, presumably Governor Miron, suggested six. This would reflect a notably broad spectrum of expected rates next year, ranging from 2.1% to 3.9%. The median outlook implies one more rate cut may occur next year, placing the federal funds rate between 3.25% and 3.5%.
The forecast indicates that Fed officials have notably raised their growth expectations for the next year. The median estimate for economic growth in the coming year is now 2.3%, an increase from the previous 1.8% forecast made in September. Meanwhile, median inflation expectations dropped from 2.6% to 2.4%, while core inflation, which omits food and energy, is anticipated to be 2.5% next year, down from 2.6%. The unemployment rate estimate remained steady at 4.4%.
Though only 12 officials from a rotating group—the Fed chair, six directors, the New York Fed president, and four regional Fed presidents—vote during the FOMC meetings, 19 officials submitted forecasts. This larger group includes local Fed presidents without voting powers.
The Fed directly influences two key interest rates: the overnight bank borrowing rate, known as the federal funds rate, and the rate banks earn on their reserves. The anticipated trajectory of these short-term rates also impacts long-term rates for mortgages, auto loans, corporate debts, and federal bonds.
Following the announcement on Wednesday, the 10-year Treasury yield decreased by 0.016 points to 4.17%, slightly higher than it was at the end of October, which was the last meeting of the Fed. The two-year bond yield saw a drop as well, falling by 0.033 percentage points to 3.578%.
