Fed’s Powell Defends 25 Bps Rate Cut As ‘Closer Call’ But Right One: ‘Best Decision To Foster Achievement Of Both Of Our Goals’

Federal Reserve Chair Jerome Powell said on Wednesday that the decision to reduce the key rate by 25 bps was a closer call but the right one.

“I would say today was a was a closer call but we decided it was the right call because we
thought it was the best decision to foster achievement of both of our goals — maximum employment and price stability,” he said in the FOMC conference. 

Powell said the Fed sees the risks as two-sided — moving too slowly and needlessly would undermine economic activity in the labor market and moving too quickly and needlessly would undermine its progress on inflation. “So we're trying to steer between those two risks and on balance we decided to go ahead with a further cut,” he said.

The Fed Chair also noted that although the labor market is still cooling by many measures, it’s
not cooling in a quick way that raises concerns.

On Wednesday, the Federal Reserve delivered the much anticipated 25 basis points rate cut, bringing the Fed Funds rate down to 4.25%-4.5, levels seen in December 2022.

Powell said that with Wednesday’s action, the central bank has lowered its policy rate by a full percentage point from its peak and its policy stance is now significantly less restrictive. “We can therefore be more cautious as we consider further adjustments to our policy,” he said.

The central bank has also increased its projection for the change in real GDP for 2024 to 2.5% compared to the 2% projected in September. However, for the longer term, it has maintained its projection of 1.8%.

The unemployment rate projections have been brought down to 4.2%, compared to 4.4% projected in September. The Fed has also raised its PCE inflation expectation to 2.4% for 2024, marginally higher than the 2.3% projected in September. Core PCE inflation expectations stand at 2.8%, slightly higher than the earlier expectation of 2.6%.

According to a CNBC report that cited the Fed's dot plot matrix, the central bank has indicated that 2025 will witness only two more rate reductions.

JPMorgan’s chief global strategist David Kelly reportedly believes the Fed is preparing for a more cautious approach to monetary easing next year.

“Right now, there is sort of this lull between administrations. I think at some stage there’s going to be some pressure on them from the administration to be more easy,” Kelly said, according to a CNBC report.

Following the policy announcement, benchmark U.S. indices sold off with the S&P 500 closing 2.95% lower while the Nasdaq Composite closed 3.56% lower. The SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust, Series 1 (QQQ), however, were trading in the green in Thursday’s pre-market session. Retail sentiment on Stocktwits for these ETFs ranged from ‘neutral’ to ‘bearish.’

SPY’s Sentiment Meter and Message Volume as of 7:50 a.m. ET on Dec. 18, 2024 | Source: Stocktwits QQQ’s Sentiment Meter and Message Volume as of 7:50 a.m. ET on Dec. 18, 2024 | Source: Stocktwits

Retail chatter indicated users on the platform expressed optimism despite Wednesday’s sell-off.

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