Signals from the November meeting, along with recent signs of a reacceleration in the economy, suggest that the chances of another rate cut in December have diminished.
During a week marked by the US presidential election and market volatility, the Federal Reserve decided to reduce its key rate by 25 basis points (bps), as planned. Amid this turmoil and generally positive messages from the latest macroeconomic data, Fed Chairman Jerome Powell stressed that downside economic risks had eased, but that the policy rate remained above the rate neutral, suggesting that gradual declines could still take place over time. Although he declined to provide guidance on the rate decision at the December meeting, he stressed that the recent presidential election would not impact the decision.
In our view, signals from the November Fed meeting, as well as recent signs of a reacceleration of the economy in the third quarter – with strong momentum expected to continue – suggest that the chances of a further rate cut in December have narrowed. With the Fed having already cut rates by 75 basis points since September, it has the flexibility to move slowly and methodically from here on out.
The Fed has the flexibility to stay on a path of moderate rate cuts.
No news in November
Jerome Powell avoided giving specific guidance during the press conference, and the Fed did not release new projections at its November meeting. The changes to the statements were also moderate, which Powell highlighted in his comments. He also rejected the need for a sharp revision of monetary policy in either direction, arguing that recent GDP revisions had reduced downside risks to the economic situation at the September meeting. , while noting that long-term inflation expectations remained anchored. Powell noted increased uncertainty about the economic outlook, and we believe the Fed will proceed cautiously in slowly moving rates toward neutrality, while remaining data-dependent.
The US economy remains resilient despite uncertainties
Since the last Fed meeting in September, economic data continues to show resilience in the US economy. Real GDP growth was again strong in the third quarter, supported by a 3.7% annual increase in real consumption, with upward revisions to previous GDP figures. Inflation has also picked up, and the aftermath of two major hurricanes could slow or even halt efforts to control inflation, at least temporarily. Additionally, economic activity may increase in the fourth quarter as businesses and consumers anticipate possible further tariff hikes in 2025. These factors supported the Fed’s decision to slow the pace of rate cuts from 50 basis points to 25 basis points, while indicating that it remains flexible and data-dependent in the future.
Despite this recent resilience, we believe the Fed has the flexibility to remain on a moderate rate cut path. The gradual rise in unemployment in generally balanced labor markets supports a return to the neutral level. Given the progress this year in combating inflation, we believe the Fed can gradually reduce rates back to a more normal or neutral level, taking pauses if necessary. It would take a significant acceleration in inflation – which we consider unlikely at this stage – to justify a resumption of rate hikes.
The relatively weak October jobs report (even after adjusting for temporary disruptions from hurricanes and strikes) also highlighted the risk that a further cooling of the labor market could push the Fed to adopt a more aggressive monetary policy.
Fed officials will also need to factor in the economic effects of tax and trade policy changes under the Trump presidency.
We expect they will wait until they have some perspective on the election, as well as additional data on inflation and the labor market, before providing detailed guidance at the December meeting. While modest adjustments to its forecast are possible, we also believe the Fed is prepared to cut rates more quickly if downside risks to the labor market materialize. Starting in January and beyond, greater clarity on the positions of Congress and the White House will help refine the Fed’s trajectory.
Political uncertainty will not distract the Fed from its mission
Many are wondering what impact Donald Trump’s return to the White House could have on the Fed and its president, Jerome Powell. We are confident that the Fed will maintain its independence and remain focused on its dual mandate, regardless of the political situation. Indeed, Powell’s term ends in May 2026, and he clearly signaled his intention to see it through during the press conference. Additionally, most Fed Board members have substantial terms remaining, so President Trump will only be able to appoint a few new officials, and slowly.
The Fed remains primarily accountable to Congress, which created it and defined its mandate, and to the public. Its independence allows it to implement its monetary policy based on data, analysis and judgment, without political interference. In recent years, several Fed nominees proposed by Republican or Democratic presidents have faced obstacles in the Senate and failed to join the board. The Fed’s rate cuts, both before and after Election Day, as well as officials’ consistent refusal to comment on political developments, underscore their resolve.
Although we expect the Fed to remain apolitical, Fed officials will need to take into account any changes in tax or trade policy that impact the economy when setting monetary policy. For now, we believe the Fed has room to continue normalizing rates gradually, pending greater clarity on the new administration.
