Today the US Federal Reserve (Fed) lowered the target range for the federal funds rate by 25 basis points (bps) bringing the new target range to 4.25% to 4.5%.

 

In the Federal Open Market Committee (FOMC) statement, the Fed acknowledged economic activity continues to expand at a solid pace, labour market conditions have generally eased and the unemployment rate (despite a recent increase) remains low. Although inflation in the US is making progress towards the 2% target rate, it remains elevated. The FOMC reiterated its commitment to supporting maximum employment and returning inflation to its target.

 

CIBC Capital Markets confirms today’s rate cut was not surprising and says the Fed is likely going to be more cautious with future rate cuts—even entertaining a pause on cuts. The December projection now shows the median voter expects two rate cuts in both 2025 and 2026, and only one cut in 2027. This implies the target for the federal funds rate will end 2027 at 3.125%. There’s good reason to be cautious about future rate cuts because it’s not obvious the economy needs a lot more rate relief and the incoming US administration warrants a cautious approach. Consistent with the slower downward path for interest rates, core inflation was revised up with the FOMC expecting underlying inflation to remain a bit sticky over the next two years.

 

Adam Ditkofsky, Senior Portfolio Manager, Global Fixed Income at CIBC Asset Management says today’s rate cut was also in line with our expectations. “The action was seen as being hawkish, as future rate projections for 2025 and 2026 were revised higher. This implies the Fed doesn’t see the US needing as many rate cuts as previously projected. The FOMC also revised expectations for inflation from 2.1% to 2.5% in 2025, again in line with our expectations. Overall, the FOMC believes less action is needed going forward especially as the economy continues to remain on solid footing. We believe this makes sense especially with the upcoming change to the US administration and President-elect Trump’s aggressive policy plans.”

 

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