The Federal Reserve cut interest rates by half percentage point on Wednesday after signals it would do so. It’s the first rate cut since the first days of the COVID-19 pandemic.
Softening jobs reports are one of the factors behind the cut, which drops the federal funds rate to 4.75%-5%.
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“Job gains have slowed, and the unemployment rate has moved up but remains low,” the Federal Open Market Committee said in a statement after its meeting. “Inflation has made further progress toward the Committee’s 2% objective but remains somewhat elevated.”
There may be more to come.
Dr. Bob Dieli, economist with MacKay & Company, said the FMOC signaled more cuts ahead. In a statement, the committee says it is “strongly committed to supporting maximum employement and returning inflation to its 2% objective.”
“It’s a first step,” he said.
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Other economic indicators remain strong, including rising gross domestic product, but the Fed looks at more than just that in determining when to cut rates and by how much.
“Recent indicators suggest economic activity has continued to expand at a solid pace,” the statement said.
FMOC acknowledged risks remain with an “uncertain” economic outlook, and said it would evaluate readings on labor market conditions, inflation pressures and expectations, and financial and international developments.
Dieli said some of this is the Fed trying to remain balanced in its statements. He said everyone has to expect the Fed to adjust its policy as needed to maintain the health of the financial system.
“We haven’t forgotten 2008,” he said. That year’s financial crisis was the last time, outside of emergency COVID reductions, the FMOC issued a rate cut of this size.
Dieli said it will take some time for the aggressive cut to move through the system and even more time to ascertain what the FMOC might do next. He pointed to Federal Reserve Chairman Jerome Powell’s annual testimony to Congressional committees at the beginning of the year as a key to what it’s thinking. That is where Dieli says most of the hard policy happens.
“The rock just hit the pond. We haven’t seen where all the ripples are going yet,” he said.
One of the ripples is it just got less expensive to borrow money, Dieli said, and banks may be looking to lend money more readily.
“Bankers are in the business of selling money,” Dieli said. “It’s easier to sell money when it’s cheap.
This could be good news for a pre-buy ahead of the EPA’s 2027 emissions regulations. Dieli said OEM financing isn’t as sensitive to interest rates as bank financing. However, the timing of the pre-buy is set in stone, Dieli said, because of the timing of the regulations themselves.
It’s also good news for business looking to update or install new equipment, invest in a new location and other types of capital spending.
The FMOC will meet again Nov. 6-7 and Dec. 17-18.
Voting for the rate cut were Powell, Vice Chair John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Lisa D. Cook, Mary C. Daly, Beth M. Hammack, Philip N. Jefferson, Adriana D. Kugler and Christopher J. Waller.
Voting against the cut was Michelle W. Bowman, who preferred to lower the rate by a quarter point.
