The Fed cut interest rates by 25bp and maintained the pace of balance sheet reduction (i.e., Quantitative Tightening) at the November 6-7 FOMC meeting. The federal funds target range was lowered by a quarter percentage point to 4.50-4.75 percent. Another 25bp cut in December is likely in our view, but the path for rates in 2025 and beyond is now less certain following the US elections.

Trusted Insights for What’s Ahead

• As we expected, the Fed cut interest rates by 25bp in November, given what appears to be a sweet spot for the US economy.
• Inflation is heading back to target, the labor market is “solid,” and real GDP growth has surprised to the upside in the Fed’s view.
• The Fed Chair stated that US election results will have no impact on monetary policy in the near term, likely as the new administration will come into place in 2025.
• The Chair also said that the Fed will not proactively alter the path of monetary policy to account for proposed changes in fiscal policies on the campaign trail.
• Regarding the outlook for interest rates, the Fed Chair stated that the base case remains for gradual reduction of interest rates, but would not rule anything out, including hikes.
• The September Summary of Economic Projections suggested rates will fall gradually over the course of the next year or so and the fed funds rate will settle in a range just under 3 percent in 2026.
• We maintain our expectation of another 25bp interest rate cut in December, but our call for 25bp cuts per meeting in 2025 through Q3 2025 to 3.00-3.35 percent is now in flux.
• Major fiscal, trade, and tax policy changes may hasten, slow, or even reverse the course towards the new equilibrium Fed funds rate.
• We will assess the likelihood of these developments and update our forecasts accordingly within the next few weeks.
• Visit The Conference Board 2024 Elections Hub to find tools and insights, and information on how to join the Economy, Strategy & Finance Center.

FOMC Meeting Highlights

Fed Looking backward

Focusing on the past, the policy statement stated that economic activity has continued to expand at a solid pace, the labor market has eased from heady conditions but remains healthy, and that while still somewhat elevated inflation is progressing towards the 2-percent objective. Importantly, the Fed believes that risks to achieving its dual mandate – price stability (2-percent inflation over the longer run) and maximum employment – are roughly in balance.

GDP and labor market remain solid. This assessment aligns with our views on the US economy since the September meeting. Real GDP grew at a robust clip in Q3 2024, led by consumer spending on goods and services. The Fed Chair even stated that economic activity has been generally stronger-than-expected taking some of the downside risks off of the table. The FOMC did not mention the impact of strikes or hurricanes on the economy in the policy statement, but it was mentioned in the Fed Chair’s press conference as having an impact on October employment. It seems policymakers are looking through these events as the economy typically rebounds from such shocks within a quarter or two. Notably, nonfarm payrolls added up to a modest 12,000 net gain in October. However, sifting through the details revealed that strikes likely cut about 50,000 workers, many people reported being not at work due to bad weather, and the percent of temporarily unemployed persons increased in the month. Moreover, despite volatility in underlying data in October, the unemployment rate held at 4.1 percent. As the Fed mentioned in the policy statement it has moved up since last year but remains low.

October tracking mixed to-date. We note that there is limited information on GDP in October, apart from confidence surveys and business activity measures. The Conference Board Consumer Confidence Survey showed a pop in consumer’s views on both current conditions and expectations 6-months hence, especially pertaining to the labor market. Consumers continued to cite prices and inflation as affecting the US economy, but noted that there was relief in these areas. The Conference Board measure of CEO Confidence for the US, revealed moderation in optimism and increasing concerns about the outlook for the economy and their own industries ahead. But purchasing manager surveys revealed that while manufacturing activity remains weak, as it has over the last few years, services activity remains strong. It is yet unclear how the hurricanes impacted household spending, but most consumers are working, and real incomes are growing thanks to elevated wage growth, and significantly reduced inflation. Indeed, the Fed Chair said was wage growth was roughly consistent with 2-percent inflation. These factors probably supported spending in unaffected states.

Still on the path towards inflation target. The FOMC statement and the Fed Chair provided a slight nod to the apparent stickiness in underlying inflation. Headline PCE inflation is right above the 2-percent target and core- and super-core inflation are also closer to target. Importantly, shelter costs – a major driver of year-over-year inflation – are gradually cooling consistent with past easing in home prices. Still inflation has yet to achieve the 2 percent target and there are forces placing upward pressure on the gauges. The Chair said in the press conference that core inflation remains elevated, especially on three- and six-month annualized basis. We note that upward pressures include rising insurance premiums and elevated wage growth in several industries, especially those experiencing persistent labor shortages. Still, the Fed believes inflation gauges remain on the path back to the 2-percent inflation target.

Fed Looking forward

Regarding the outlook, the FOMC reiterated typical guidance that it will remain data dependent and observant of financial conditions and stands ready to adjust monetary policy to address emerging risks that might impede attainment of the Fed’s goals. Importantly, the Fed is in “no hurry” to ratchet down interest rates. It will do so carefully and thoughtfully.

No preemptive reactions to campaign promises. Unsurprisingly, there was no mention of stated campaign policies or changes in fiscal or trade policy post-election affecting the path of monetary policy presently. The Fed Chair did say that in the very near term (we interpret this to mean for today’s meeting and looking ahead to the December meeting) the elections will have no effects on monetary policy. Beyond that, there is uncertainty over what policies will be implemented and how the Fed would respond. The Fed acknowledges that there could be changes in policies that would impact the economy, but they would incorporate those changes into their risk analysis, models and policy calculus as they emerge. The Fed Chair highlighted that geopolitical risks, for example, are elevated and have had, in his view, minimal effect on US economy. But this fact could change, if for example geopolitical shocks raised the price of oil, which might affect the economy and elicit a monetary policy response. The Chair reiterated, that fiscal policy is on an unsustainable path, not necessarily the level of debt currently, and will ultimately be a threat to the economy. Still, he doubled down on the fact that the Fed will not preemptively alter policy to reflect campaign promises.

Fed Post-election Challenges for 2025 and Beyond

Following the results of the 2024 election, the Fed may be faced with new headwinds to the economy and potentially greater uncertainty in 2025 and beyond. Depending upon which policies are enacted under the next administration, the Fed might be led to slow or accelerate the pace of interest rates depending upon the impacts on inflation, GDP growth, the labor market, and financial conditions.

Risk of new tariffs and trade wars. The potential application of more and larger tariffs on imports either from individual economies or more universally, poses upside risk to inflation, but also downside risk to growth. Additional US tariffs on foreign goods would likely also result in retaliatory actions by target economies that would raise inflation and dampen GDP growth globally. Additionally, global trade wars might create shortages of key inputs like metals for steel, computer chips, or rare earths used in batteries and cellphones. Intensification of trade wars might accelerate US onshoring/reshoring.

Geopolitical shocks and reshoring. There could be geopolitical implications of the elections resulting in global shocks to commodity prices, which would also stoke inflation. Namely there could be intensification and/or expansion of existing hot wars that would raise food and/or energy prices. Reshoring is positive for US GDP growth as factories must be built. It is also inflationary as goods production would move from lower cost jurisdictions to a higher cost one, and some of the costs of building new facilities might be passed onto consumers.

Possible tax cliff. The looming tax cliff of FY2026 might be mitigated by extensions of existing tax cuts passed in 2017, especially for individuals. This would have no material impact on the economy in the short run, as the extensions would maintain the status quo, but bloat annual federal budget deficits and expand debt over the longer run. Outsized sovereign debt is typically inflationary and crowds out private investment. Still compromises to extend the cuts might include reductions to federal spending which might dampen growth in the short run.

Potential debt ceiling debacle. The debt ceiling will resurface as a issue for the US economy starting in January 2025. Addressing the debt ceiling will require congressional action. Delays in raising, suspending, or eliminating the debt ceiling could stoke financial market volatility. Any action on the debt ceiling might also be accompanied by significant spending cuts, which would cut the outlook for real GDP growth. Meanwhile, the Fed may need to slow QT to accommodate Treasury’s extraordinary measures it will take to delay a debt ceiling breach. This is because extraordinary measures temporarily shrink the Treasury’s deposits with Federal reserve banks, which is recognized as a liability on the Fed’s balance sheet. Default on the debt that lasts for more than a few days probably would result in a US and/or global recession, which would require an immediate monetary policy response.

Political pressures. When pressed by reporters at the FOMC press conference whether he would step down from his role at the incoming president’s request, the Fed Chair said “no.” He also stated that under the law, Fed governors could also not be removed at the president’s request. This underscores potential intensification of political pressures ahead on the Fed to adjust monetary policy in a manner that would be inconsistent with stated goals.  Currently, Congress allows the Fed to remain independent, helping to insulate it from political pressures. Unless there is some change in the law, the Fed will continue to conduct monetary policy with the dual mandate in mind, along with maintaining financial stability.