Kudos to the Federal Reserve for taking this courageous step! So far, they’ve reduced their policy rate target by 25 basis points, bringing it down to a range of 3.50% to 3.75%. This announcement comes at a time when the economy is providing conflicting signals. Some FOMC members are arguing for an even more aggressive cut. On the other side of the spectrum, some wanted to increase the time. The signal to the broader financial markets was one of approval, as seen by strong rebounds by major stock indices.
And the European Central Bank (ECB) has made any kind of rate cuts impossible through 2026. This step is highly indicative of its determination to stick with an even more anti-inflationary monetary policy course. On the other hand, Norway was recently able to report a drop in core inflation with September’s year-over-year rate coming in at 3.0%. Instead, the reality is that countries are reeling from economic shocks. New information from Sweden and Canada underscores the key regional economic story.
Federal Reserve’s Decision and Market Reaction
The Federal Reserve’s rate cut of 25 basis points is a prudent recognition of where we are in uncertain times. FOMC member Miran fought for a bigger move—a 50 basis points bold cut. Opposed to moving forward with my colleagues Schmid and Goolsbee, who instead defended making the rates unchanged. This split between policymakers illustrates the deep divide that still exists over what the right monetary policy should be given today’s economic reality.
During the press conference following the announcement, Federal Reserve Chair Jerome Powell adopted a sober, but reassuring demeanor. He dutifully sidestepped all attempts to elicit any hawkish forward guidance. This policy resulted in a drop in U.S. Treasury yields and a widespread dollar depreciation. Financial markets were ecstatic with the announcement. The S&P 500 index jumped by 1% immediately thereafter, and closed the day up 0.7%. Even the small-cap Russell 2000 impressed with a 1.3% jump.
Despite the historic rate cut, signs of stress on the U.S. economy continued to mount. This was evident from a 0.3% month-over-month drop in GDP proxies. Second, this latest contraction adds to the uncertainty around future growth prospects and evidence of success from the monetary policy measures to date.
European Central Bank’s Stance
In Europe, the ECB has played the role of Avenger of Hawkishness by removing any possibility of rate cuts until at least 2026. This decision highlights the ECB’s greater resolve to keep a lid on interest rates following persistent inflationary pressures throughout the Eurozone. Initially, the ECB’s emphasis seems to be on stabilizing rather than stimulating the economy through successive rate cuts.
So the ECB should be preparing for their next monetary policy meetings. Market analysts are scrupulously tracking economic signals to try and guess when this hawkish position of the Fed might reverse. The European economy is similarly challenged, as surging energy costs and inflationary pressures further cloud the decision-making at the central bank.
Regional Economic Developments
In a positive turn, Norway is seeing a significant drop in core inflation, which has dropped down to 3.0% y-o-y as of reported November. This decline comes as a welcome relief to consumers and businesses alike. With global economic uncertainties increasing, upholding the foundation of price stability is imperative now, more than ever. Our Norwegian Regional Survey is due to be published any day now. This annual survey should provide some great insight into the current state of regional economic conditions.
Sweden has published the weakest activity index for October. In particular, household appliances and electronics have had annual growth fall near record lows witnessed in September. Picture this – you’re about to enter the transportation profession. Very soon, the final numbers for November’s inflation will come out, giving us a better picture of Sweden’s inflation path.
In Canada, the Bank of Canada held its benchmark interest rate at 2.25%. As the economy continues to send perplexing signals, this decision demonstrates a measured approach among uncertain times. This underscores the central bank’s credibility on balancing growth with the need to contain inflation.
In Denmark, inflation remained unchanged at 2.1% year-on-year for November. Food prices fell by 0.9% from October. These figures illustrate varying inflationary trends across different regions and highlight the complexities facing policymakers as they strive to maintain economic stability.