Fed signals interest rate pause, raises growth outlook

The U.S. Federal Reserve concluded its monetary policy meeting by lowering its target for the federal funds rate by 25 basis points, bringing it to a range of 3.50% to 3.75%. This marks the third consecutive reduction, aimed at addressing cooling inflation and labor market conditions.

However, Fed officials indicated an intention to hold rates steady in the coming months. Fed Chair Jerome Powell stated that the central bank has reached the upper end of the neutral monetary policy stance and is well-positioned to assess future economic developments. Projections from Federal Open Market Committee (FOMC) members showed a median expectation of no further rate cuts beyond 2027.

Alongside the rate decision, the Fed revised its economic projections upward. The forecast for economic growth in 2026 was significantly increased from 1.8% to 2.3%. Powell cited resilient consumer spending, robust artificial intelligence investments, and expansionary fiscal policy as key drivers supporting this optimistic outlook.

Regarding inflation, the Fed's outlook became more dovish, with the median projection for core inflation (PCE deflator) in 2026 falling to 2.5%, below previous estimates and current market consensus. Powell emphasized that tariffs are not creating sustained inflation and that disinflationary pressures are becoming more apparent in the services sector.

In a move to ease conditions in short-term funding markets, the Fed also announced plans to purchase $40 billion in Treasury bills per month starting in December. This action is intended to provide liquidity and supports the central bank's overall policy stance. Hermann Bantleon GmbH noted that Powell managed to strike a balance, tempering expectations for further cuts while not entirely closing the door on future adjustments.