The Federal Reserve Rate Decision
- The Federal Reserve reduced the interest rate by 25 bps to 4.25%, as expected, and opened more paths to more easing this year.
- The decision was made due to a sluggish labor market, given the changes in immigration and some from the tariff uncertainty.
- The FED Chair Powell flagged both dual mandates: inflation risk and unemployment risk, signaling a head tilt to a stagflation scenario.
- However, with the recent strong demand and an improvement in growth projection, some concerns about stagflation could diminish.
- The projection: GDP growth and inflation are expected to grow compared to the June projection, while the unemployment rate is expected to rise to 4.5% in 2025, from the recent 4.3%.
- Despite FED Chair Powell’s focus on the labor market concerns, the market still raised doubts on the inflation problem and whether the FED can achieve it within the timeframe.
In short, the Federal Reserve will focus on the labor market, while the reporter is still concerned about inflation. The overall market is still priced in for the October and December rate cuts.
Opinion:
The surprising part is that a newly joined Stephen Miran is the only one voting for the 50 bps rate cut, while the other two—Bowman and Waller, who are expected to follow the same—did not. This shows a win situation for Powell.
The Bank of Canada
The Bank of Canada (BoC) also cut the rate by 25 bps to 2.5% given the fragile economy and low inflation rate, while hinting at having another cut in October. Although easing would stimulate growth, over-easing too quickly could possibly pose an inflation risk again.
