Monetary Policy
▪ The FOMC announced today it will cut the Federal Funds target rate by 25 bps to a range of 3.50 – 3.75%, the third consecutive 25 bps rate cut of 2025. While another cut was not a foregone conclusion by mid-November, markets had come to anticipate this decision.
▪ It was expected to be a divided FOMC, and the decision was made with a 9-3 vote. Fed Governor Stephen Miran dissented favoring a 50 bps cut, while Kansas City and Chicago Fed Presidents Jeffrey Schmid and Austan Goolsbee both dissented favoring no rate cut.
▪ The FOMC statement no longer acknowledges that unemployment has remained low. In reviving past language from December 2024, the Committee will consider the “extent and timing” of additional adjustments to the target range.
▪ In his press conference, Fed Chair Powell said today’s decision was a “close call” and that the Committee is well positioned to wait and see new data and how the economy evolves from here.
▪ The statement also announced that the Fed will initiate the purchase of Treasury bills to maintain an ample supply of reserves. The Committee had just ended three years of balance sheet run-off earlier this month prior to today’s announcement.
▪ The summary of economic projections was updated, which includes the “dot plot” of interest rate forecasts for the end of the current year (uniquely revealing the full 19 member FOMC’s expectations for this meeting). The dot plot showed that six total members believed there should not have been a rate cut, implying four quiet or non-voting members did not support today’s decision.
▪ Median future rate forecasts were unchanged, keeping one rate cut to 3.4% in 2026, another to 3.1% in 2027, no action in 2028, then a 3% longer run rate. 2026 forecasts ranged widely with one member projecting cuts to 2.1% and three members forecasting 3.9%. Powell clarified this to mean members were forecasting holding rates or cutting because “a rate hike is not anybody’s base case.”
▪ US markets opened quietly with equities mixed and Treasury yields slightly lower across the curve. Stocks rallied following the statement and press conference with the S&P 500 rising 0.68%. Shorter-term Treasury yields declined further, steepening the curve.
Economic Conditions
▪ Committee members appeared somewhat more optimistic in their projections than in September. The median GDP growth forecast for 2025 was increased from 1.6% to 1.7%, and from 1.8% to 2.3% in 2026. Longer run forecasts for growth remain at 1.8%.
▪ PCE and Core PCE inflation projections were revised down slightly in 2025 and 2026 as it was emphasized the impact from tariffs is expected to be short-lived and effectively a one-time shift. The longer run target remains at 2.0%.
▪ Unemployment forecasts were little changed, holding a 4.5% forecast for the end of the year and falling to 4.2% in 2027 and beyond.
The FOMC is next scheduled to meet January 27 – 28th, 2026.
Disclosures
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