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Key takeaways
- A senior Fed official has indicated that he is open to cutting the central bank’s key interest rate at the Fed’s next meeting in December.
- The possibilities of lowering interest rates jumped significantly after these statements, and it now appears that they are more likely than not, according to financial markets.
- Fed officials have been torn between lowering interest rates to boost a faltering labor market or keeping them higher longer to fight inflation.
The odds of the Fed cutting borrowing costs in December suddenly flipped from unlikely to likely after the words of a key federal official.
New York Fed President John Williams shook expectations for the Federal Reserve’s key interest rate on Friday. He made comments suggesting he is open to cutting the federal funds rate at the next meeting of the Federal Open Market Committee in December to help support the labor market.
His comments made a rate cut look more likely: Financial markets were anticipating a 73% chance of a December rate cut on Friday morning after Williams’ speech, up from 39% the day before, according to CME Group’s FedWatch tool, which forecasts interest rate movements based on federal funds futures trading data.
The Fed’s 12-member policy committee was sharply divided on whether to lower interest rates to breathe some life into an increasingly slowing labor market, or keep them higher for longer to fight inflation that has exceeded the Fed’s target of a 2% annual rate for more than four years.
What does this mean for the economy
Lower interest rates can stimulate the economy at a critical moment, when the labor market is weak. However, they could also lead to higher inflation, which the Fed will have to respond by raising interest rates further in the future.
Williams said at a conference in Chile that there is “room for further adjustment in the near term to the target range for the federal funds rate.”
The federal funds rate affects interest rates on all types of debt. Low interest rates can encourage borrowing, spending and hiring, while low interest rates do the opposite and can help rebalance supply and demand to cool high inflation.
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