The Federal Reserve cut the target Fed Funds rate to the 4.25% - 4.50% range this morning. Forecasts for growth, inflation and the policy were raised for 2025. But the uncertain government policy outlook was highlighted. The market has reacted aggressively to the outlook, pricing only 1.3 more cuts next year.
The FOMC lowered the Fed Funds target rate by -0.25% to 4.25% - 4.50% and maintained the pace of reduction in bond holdings, as widely anticipated.
There was also a -0.30% change to the reverse repo rate, matching the lower bound of the target range. This was flagged in the previous minutes as a technical adjustment suggested by the NY Fed which handles all trading, essentially making the current pricing official.
There was one voter dissent from Beth Hammack of the Cleveland Fed, attending her first meeting. She preferred to hold rates unchanged at this meeting and three non-voters agreed with her.
Besides the rate change and the dissent, there was only one change (underlined below) to the official statement which was in the paragraph on policy: "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective".
2025 growth and PCE inflation expectations were revised higher by +0.1% to 2.1% and by +0.4% to 2.5%, respectively.
Expected unemployment was lowered from 4.4% to a new peak of 4.3%, where it is expected to remain until 2027.
The end-2025 expected Fed Funds rate was raised from 3.4% in September to 3.9%.
The longer-run neutral policy rate estimate was raised from 2.9% to 3.0%. It was 2.6% as recently as March.
At the press conference, Chair Jerome Powell revealed that some members had begun to take account of contingent policy expectations in their forecasts. Higher government policy uncertainty and the range of views was a theme of the Q&A discussion.
He added with a preprepared answer that "downside risks to the labour market do appear to have diminished, but the labour market is now looser than prepandemic and it's clearly still cooling further, so far in a gradually and orderly way. We don't think we need further cooling in the labour market to get inflation down to 2% [later adding that this didn't mean that more slack wouldn't be desirable]. Job creation is now below the level that would hold unemployment constant, the job finding rate is low and declining, and [other data and surveys] broadly show a much cooler labour market than we had in 2019. It's still quite gradually cooling, so we keep an eye on that."
Asked why cut, given higher inflation readings and forecasts, he responded, "We've reduced our policy rate by -100 bps - we're significantly closer to neutral. At 4.3% and change, we believe that policy is still meaningfully restrictive. But as for additional cuts, we are going to be looking for further progress on inflation, as well as continued strength in the labour market. As long as the economy and the labour market are solid, we can be cautious as we consider further cuts. all of that is reflected in [today's projections]".
S&P500 5,872 -3.0%, Nasdaq Comp. 19,393 -3.6%, Russell 2000 Small caps 2,232 -4.4%, S&P/ASX200 future 8,192 -1.6%,
US 2yr 3.94% +7bps, US 10yr 4.51% +11bps, Aus 10yr 4.36 +8bps
US dollar (DXY) index 108.25 +1.2%, AUDUSD 0.6218 -1.9%, Gold US$/oz 2,585 -2.3%
Fin-X Wealth View
Chair Powell reiterated that he was satisfied with the state of the "strong" economy, progress on inflation to date, and policy settings. However, it was clear that the government policy outlook related to taxes and tariffs is highly uncertain, leading to a range of different views among FOMC members. He emphasised that the projections were not concrete plans and that the FOMC would continue to react to incoming data and the balance of risks, as well as concrete policy announcements.
The policy changes today essentially matched market pricing before the decision.
The journalists in the room were clearly puzzled that the Fed had decided to cut at this meeting, given the rise in inflation projections away from the 2% target. Market pricing has taken it a step further, pricing just 1.3 more cuts by the end of 2025 and leading to the sell-off in both bonds and stocks and a strengthening of the US dollar.
Prices suggest that the market is placing more weight on positive economic scenarios attached to the Trump policy outlook. However, there is plenty of evidence that high prices are constraining household demand, the labour market is cooling, and the risks to the global economy are still heavily skewed to the downside.
Consequently, the rise in yields makes government bonds increasingly attractive as more Fed cuts seem likely than is currently priced, especially if tariffs are on the high side and barring any "blowout" in the Federal deficit. Unemployment rising by just +0.1% seems unlikely. US equities remain overvalued in our view, and may struggle under exhausted excess liquidity, and as corporate debt is reissued at higher rates in 2025.
For forecasts of major macroeconomic indicators, see the table below.
To interpret the dot plot, please see this video here.
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