Fed cut rates; a cut in December “far from” a forgone conclusion

As expected, the Federal Open Market Committee (FOMC), a branch of the US Federal Reserve System responsible for setting monetary policy, decided to cut rates a further 25bp. This lowers the rates from 4-4.25% to 3.75-4%. They also decided to end quantitative tightening (QT).

The vote was split three-ways with Federal Reserve Governor Stephen Miran wanting to cut rates by 50bp, and Kansas City Fed President Jeffrey Schmid wanting to keep rates on hold. Looking ahead to the December meeting, however, it was made clear a further cut can’t be counted on.

December could well be a pause: More than once, Chair Powell of the Federal Reserve said that a further rate cut at the December meeting is “far from” a foregone conclusion (including in the opening statement). He acknowledged that he always says that they haven’t decided what to do at the next meeting in advance but said that there “is something in addition here.”

• He said that there are tensions between their goals at present (i.e. downside risks to employment but upside risks to inflation), that people have different levels of risk tolerance on the Committee and that there were disparate views on the Committee (he pointed out that this can be seen in the participant projections and in their public comments). He described views as “strongly differing”.
• He said that both today’s and the previous rate cut decision had an element of risk management to them but said that going forward is a different thing.
• He also developed a line of argument around the uncertain data outlook that could justify a pause in December. In terms of the shutdown and its impact on data releases, he said if driving in a fog you slow down. He suggested there is a possibility you would be more cautious about moving policy.
• He said that rates were now in the 3-4% range where many estimates of neutral lie. After that he said: “So I think that for some part of the Committee, it is time to maybe take a step back and see whether there really are downside risks to the labour market or see whether in fact the stronger growth that we’re seeing is real.”
• Continuing that theme, he said that now they have cut another 50bp, that “there was a sense from some” of “let’s pause here” and a sense from others of wanting to go ahead.

Data not sending worrying signals on the labour market…: On the lack of data during this government shutdown, Powell did name-check several bits of data that they were looking at to help fill the gaps. The Fed Beige Book got several mentions, as did state level jobless claims data for example. He said there was a gradual labour market cooling but no more than that and painted a picture from the data itself which was relatively stable in recent weeks. He did though acknowledge recent reports of companies saying that they weren’t hiring or were making layoffs (and mentioned the link to AI) but said they aren’t picking that up in the claims data yet.

…and Powell not sounding too worried about inflation either: On the September inflation print he suggested that the Personal Consumption Expenditures (PCE) Price Index measure of inflation, excluding tariffs, probably wasn’t far from their 2% goal and that their base case remained that tariffs were a one-off price level impact (i.e. will only have a transitory impact on inflation). On tariffs he talked also about the impact of tariffs from here as likely relatively modest and maybe 2-4 tenths on inflation.

Our long-stated plan has been to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. Signs have clearly emerged that we have reached that standard.

On ending QT: this part of the decision did not feature heavily in the press conference, but Powell acknowledged the tightening in money market conditions. From the opening statement: “Our long-stated plan has been to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. Signs have clearly emerged that we have reached that standard.” He talked about them eventually needing to expand reserves again (and moving gradually towards a composition of Treasuries on the balance sheet which better reflected the existing market, i.e. with a lower duration).  

My published central case forecasts from Q3 this year were for the Fed to not cut rates further than this in 2025 but then ultimately to cut rates twice more. The 2025 bit of that view doesn’t look unreasonable set against the messaging today around the December meeting. There is still plenty of risk around the broader outlook for monetary policy though, not least with the impact of tariffs and broader policy changes still very much playing out in the data - let alone against the backdrop of a Committee who themselves have strongly differing views.

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