The Federal Reserve cut its main policy rate by another 25 basis points on Thursday, and Chairman Jerome Powell indicated more rate cuts are coming, the only question being how fast. The S&P 500 kept up its post-election Trump rally, adding a little to gains as Powell spoke.
Powell didn't provide clarity about whether a further rate cut will come at the Dec. 18 Fed meeting, sticking to a data-dependent stance. However, markets reacted favorably as Powell said he thinks the labor market is continuing to "very gradually cool."
Powell Talks Pace Of Fed Rate Cuts
Powell made clear that the Fed isn't taking for granted that the job market will stay on a firm footing, despite strong back-to-back quarters of economic growth. "Don't get behind the curve," he said, in stressing a key focus in adjusting policy.
On the other hand, Powell described the job market market as still "solid," despite a surprisingly weak October jobs report that included big downward revisions to August and September job gains. The October report showed a loss of 28,000 private-sector jobs, amid hurricanes and strikes.
Powell said the Fed will chart a "middle path" as it lowers its key interest rate to a neutral level, taking care not to move too fast that it risks stalling disinflation progress. He added that the Fed is "just beginning to think about" when it will be appropriate to slow the pace of rate cuts as it approaches its destination of a neutral rate that is neither restrictive nor accommodative.
Powell noted that wages are still running a bit above the level needed to be consistent with 2% inflation — unless the streak of higher productivity continues.
"We're five years into" a period of higher productivity, Powell said.
Powell Says Trump Agenda Isn't An Issue — Yet
Leading up to and following the election, markets have signaled that Trump's victory, and the growing likelihood that the GOP will control Congress, is an important consideration for the extent of rate cuts ahead.
Wall Street has pushed up Treasury yields on expectations that the broad Trump agenda of tax cuts, tariffs, deregulation and less immigration will lead to fewer Fed rate cuts in 2025. However, there are a wide array of opinions about the impact of Trump's victory amid great uncertainty about the timing and scale of tax cuts and tariffs.
"In the near term, the election will have no effects on our policy decisions," Powell said. He added, "We don't guess. We don't speculate, and we don't assume."
Trump's policies could impact the Fed's economic forecasts, once those policies become clear and Fed staff share their analysis with rate-setting committee members.
"There's nothing to model right now," Powell said regarding forthcoming policy changes. "All that will take time." The implication is that it will be well into 2025 before the 2024 election plays into the Fed interest-rate outlook.
Powell said the recent rise in Treasury yields probably reflects expectations of stronger growth and less downside risk. He sidestepped a question about whether bond investors could be reacting to expectations of wider fiscal deficits under Trump.
Powell Responds — Tersely —To Trump Hypotheticals
If asked to leave early by Trump, Powell offered a one-word answer as to whether he would comply: "No."
The context is that the President-elect has indicated he would like more input into monetary policy. Powell's current four-year term runs until early 2026. Trump named Powell to replace then-chair Janet Yellen in February 2018.
"Not permitted under the law," Powell said, when asked if Trump could fire the Fed chairman or demote other Fed officials.
Impact Of Trump Tariffs, Tax Cuts
In a Wednesday note, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote that a 10% tariff applied to all imports could boost core inflation by eight-tenths of a percentage point next year.
"A renewed downturn now looms for the manufacturing sector" amid retaliation by foreign governments and a stronger dollar, which makes exports less competitive, Tombs wrote.
Pantheon, which has had a dovish outlook, raised its projection of the year-end 2025 federal funds rate by 75 basis points to a range of 3.25% to 3.5%. However, the firm said it will revise its federal funds rate outlook still higher "if it becomes clear that the Republicans also hold the balance of power in the House, creating the prospect of tax cuts and an increasing budget deficit in 2026."
Nomura's U.S. economics team led by David Self and Aichi Amemiya wrote Wednesday that they now expect just one Fed rate cut in 2025, "with policy on hold until the realized inflation shock from tariffs has passed."
S&P 500
The S&P 500 rose 0.7% to a new record high in Thursday stock market action, gaining a bit of ground as Powell spoke. That followed Wednesday's 2.5% S&P 500 surge.
On Wednesday, the 10-year Treasury yield leapt 14 basis points to 4.43%, the highest since late June, but fell back to 4.33% Thursday afternoon.
The S&P 500 is up 25.2% year to date.
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