FOMC Update: Rates Lowered Again, Further Cuts Uncertain

Details of the Fed Announcement

The FOMC cut rates 25 basis points for a second consecutive meeting, and its target range dropped to 3.75-4.00% after a 10-2 vote. The committee acknowledged the uncertainty accompanying the lack of data, qualifying the way it categorized broad economic conditions. The Fed also announced that it would be ending the reduction of its asset purchases (quantitative tightening) on 1 Dec 2025.

Lon’s Views

As expected, given some not-so-subtle hints from Chair Powell, the Fed reduced the target range for the Fed funds rate. I didn’t expect two rate dissents at this meeting. I anticipated Miran would dissent in favor of a 50-basis-point reduction. He’s all-in on lower rates. However, the Schmid dissent in favor of no change was unexpected. In hindsight, however, last month’s SEP showed seven people favored one or no rate changes from September to December.

The clamor to end quantitative tightening became louder in recent weeks as overnight rates continued to rise above target rates and reserves approached what Chair Powell would likely describe as ‘ample’ rather than ‘abundant’ levels. Furthermore, I’m sure the Fed has no desire to relive the front-end troubles of 2019, especially as we head into year end. It wasn’t a surprise to see little change to the FOMC statement as it relates to inflation and the labor market, given the government shutdown. The committee leaned a bit heavier into the weakening labor market trend by saying “downside risks to employment rose in recent months.” This change aligns with the decision to cut rates.

While the Fed continues to have access to various data sources, such as direct conversations with businesses in its local districts, the available picture of the economy’s health was murkier than usual due to the government shutdown. Powell will likely downplay any impact, as market confidence in decision-making is important, but any mistake could trigger volatility.

Key Takeaways

Unlike most post-meeting press conferences, Chair Powell was clearly on a mission this time to reset the market’s expectations for a rate cut in December. He signaled another rate cut “is not a foregone conclusion” at the remaining meeting in December. He added, “Far from it.” He also said that “We’re at a place now where we have, in fact, cut two more times … we’re 150 basis points closer to neutral, wherever that may be, than we were a year ago. There’s a growing chorus now of feeling like maybe this is where we should at least wait a cycle.” The likelihood of another quarter-point rate cut in December dropped to the low-to-mid 60% likelihood level after surpassing 90% prior to the statement.

In concert with the end of quantitative tightening, Powell stated the Fed also wants to lower the duration of its balance sheet to that of the overall market. However, it will be done very slowly such that it is not noticeable by the market.  The market seems to believe him as the difference between the front end and back-end Treasury rates barely moved, though that certainly could change as the adjustment is carried out.