Summary
✅FED cuts rates by 25 bpb
✅Prior was 4.50-4.75%
✅Pricing was for 48.3 bps of cuts in 2025, now at 39 bps
✅The statement is nearly unchanged. The lone change was adding the words ‘the extent and timing’ in this line:

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.

Powell Statement
✅Inflation is much closer to 2% goal
✅The labor market is not a source of significant inflation pressures
✅Total PCE prices likely rose 2.5% in 12 months ending in Dec, with core up 2.8%
✅Inflation expectations remain well anchored
✅Consumer spending has been resilient
✅Investment in equipment has strengthened
✅We are attentive to risks on both sides of the mandate (Inflation & Labour)
✅We are not on any pre-set course
✅Median projections are somewhat higher, consistent with higher inflation forecasts
✅If inflation is stronger we can dial back policy more slowly
✅Can ease more quickly if labor market weakens unexpectedly or inflation falls more quickly
🤷‍♂️Fed is indicating they have a soft-landing secured
🤷‍♂️The Fed has unemployment peaking at 4.7% over the next 3 years there are no expectations that it could go higher. Canada is an a good example of how quickly unemployment can rise.
🤷‍♂️Fed seems to be more concerned about inflation and less concerned about unemployment. This may come back to bite them in the back.

Powell Q&A
✅We don’t think we need further cooling in the labor market to get inflation down to 2%
✅Labor market is quite gradually cooling
✅We see the inflation story as broadly on track
✅Job creation is below the level that would hold jobless rate consistent
✅Downside risks to labor market have diminished but still cooling
✅The actual cuts next year will be in regards to data, not anything we wrote down today
✅As for additional cuts, we’re going to be looking for further progress on inflation or weakness in jobs
✅⚠️Surveys showing a much cooler labor market than in 2019; still quite gradually cooling.
✅As long as jobs and inflation are solid, we can be ‘cautious’ about cutting
🤷‍♂️This is critical going forward unemployment will dictate further rate cuts or pauses. We will see what jobless claims are tomorrow and we will go from there.
🤷‍♂️The current baseline is pointing to pausing rate cuts and leaving rates unchanged for January.
✅We had a year-end inflation forecast and ‘it’s kind of fallen apart’ that was probably biggest factor in dots
🤷‍♂️The market doesn’t like to hear the Fed chair say ‘it’s kind of fallen apart’ in any context. We are seeing markets fall as Powell is speaking.
✅Committee is discussing how tariffs could affect inflation
🤷‍♂️This might be another reason why the Fed maybe interested in pausing rates. Last couple of meetings Powell suggested that the fed wont react until policy is enacted
✅It’s premature to make any conclusions about tariffs, don’t know what countries, what size, how long
✅We are at the stage of thinking through questions, not getting definitive answers
✅A drop to 2.5% core inflation next year would be ‘significant progress’
✅’extent and timing’ language shows where we are at a point where we can slow the pace of cuts 🤷‍♂️Again pointing to pausing rate cuts in January
✅We have to continue to have restrictive policy to get inflation to 2%
✅Also notes they need to keep a close eye on employment and keep it where it is
🤷‍♂️Doesn’t correct question that assumes January “skip” meetings on rate cuts
✅Housing services inflation has come down steadily
✅ Fed is not allowed to own Bitcoin; no reserve for crypto. We’re not looking for it
✅ “It’s pretty clear we’ve avoided a recession.”
🤷‍♂️Fed just declared victory, that inflation has come down and we’ve avoided a recession
✅We do think the labor market is still cooling, but not in a way that really raises concerns
✅We need to see progress on inflation and that’s how we’re looking at it
✅The downside to the labor market clearly has diminished
✅You can see an ongoing softening in labor…. Part of why we cut today.
✅Inflation has been ‘a little bit’ more stubborn
✅Geopolitical turmoil remains a risk
✅It’s appropriate to proceed cautiously

Fed Statement
✅The Fed cuts rates by 25 basis points, as expected.
✅A 25 basis point rate cut was fully priced in.
✅The Fed removes the line “the Committee has gained greater confidence that inflation is moving sustainably toward 2 percent”.
✅Prior statement repeats that economic activity “has continued to expand at a solid pace”
On employment says “Job gains have slowed, and the unemployment rate has moved up but remains low” vs “labor market conditions have generally eased, and the unemployment rate has moved up but remains low”.
✅Repeats that inflation has made progress towards target.
✅Repeats that “the Committee would be prepared to adjust the stance of monetary policy as appropriate”.
✅There were no dissents.

🤷‍♂️Removing the line about greater confidence may highlight that they have less confidence that inflation is going to stay low in light of better data that’s recently come out.

Powell Statement & Q&A

✅We are attentive to risks on both sides of the mandate.
✅Noted hurricane and strike effects on jobs in November.
✅Wage growth has eased.
✅Unemployment has edged down in past 3 months, remains low.
✅Labor market conditions now less tight than just before pandemic, notes it’s not a source of significant inflation pressures.
✅We’ve watched the run-up in bond rates and they’re nowhere near a year ago. We will see where they settle. 🤷‍♂️They seem pretty close ??
✅We’ve all read decompositions on why yields have moved up but we think they’re about fewer downside risks and better growth (not inflation).
✅We don’t guess, speculate or assume on fiscal policy
✅Data has been stronger than expected in the inter-meeting period
✅Some of the downside risks have been taken away
✅Overall, we’re feeling good about economic activity
✅We had one inflation report that wasn’t as good as hoped
✅We will make a decision on rates in December when we get there
✅Jobs report wasn’t terrible but was worse than expected
✅The latest economic data has been strong
✅Policy is still restrictive but we feel it is still restrictive and labor market has cooled a great deal and is essentially in balance
✅We don’t need further cooling to achieve our goals
✅Powell says there is no signal in the removal of the line about “gaining greater confidence”
✅When we are at neutral, or close to neutral, we might slow the pace of rate cuts…something we are just beginning to think about
✅This isn’t a tight economy. A lot of the inflation we’ve seen this year has been catch-up inflation 🤷‍♂️Wonder how the upcoming inflation report will impact rate cuts?
✅Labor market is continuing to very gradually cool, is in a good place
✅The right way to find neutral is very carefully
✅We don’t think we need inflation to soften much to get inflation back to 2%
✅Powell says if he was asked to resign he wouldn’t
✅It will take some years of real wage gains for people to feel better about prices
✅We are going to move carefully as this goes on, to increase chances we’ll get it right
✅We don’t know where neutral is but we
✅Our baseline for next year is to gradually move rates towards neutral see where they settle. 🤷‍♂️They seem pretty close. I think Powell is referring to 5% rates last October but I certainly wouldn’t say 10s are ‘nowhere near’ last year at this time.

🤷‍♂️The comment about the pace of rate cuts and getting back to neutral is dovish, that highlights a very high probability of a cut in December and continuing through 4% but it contrasts with the comment about moving carefully.
🤷‍♂️I think Powell is referring to 5% rates last October but I certainly wouldn’t say 10s are ‘nowhere near’ last year at this time.
🤷‍♂️There weren’t any insights on what’s coming next. The one nod is that they will normalize ‘more slowly’ if the economy runs better. Does that mean a halt or just slowing to a cut at every other meeting, who knows?