BY: Matthew Kimbrough
Portfolio Manager
A Mere Seven Weeks
A mere seven weeks have passed since the last FOMC meeting, but so much has transpired over these 7 weeks that it feels like a longer span of time has gone by.
Of course, the most significant event within this window was the U.S. Presidential election. I won’t cover much about that here, except to say that over the past several weeks, election talk, election-related forecasts, fiscal policy considerations, and so-called “Trump trades” have overshadowed any speeches from FOMC members.
Let’s go over some of the economic data that has been received since the last FOMC meeting. The third (and final) estimate of Q2 2024 GDP came in higher than expected, at 3.0%. On the inflation front, Core PCE remained higher than expected, at 2.7%, and core CPI increased from 3.2% to 3.3% in mid-October. As for payrolls, a blockbuster NFP number in early October was mitigated by a rather lackluster print in early November, but the unemployment rate is back down at 4.1% (which is also back below the Sahm Rule threshold). The vast majority of this economic data has run contrary to the message that the Fed was espousing in mid-September (which was something to the effect of – inflation is almost under control, we’re equally worried about the other side of the dual mandate because of rising unemployment, and we’d better act quickly before the economy slows down further).
In his last press conference, Fed Chair Jerome Powell did his best to provide a minimal amount of guidance for further Fed policy action while retaining his data-dependent stance. The SEP that was released at that time projected two more 25bp rate cuts this year and another four 25bp rate cuts in 2025, and Powell stressed that this is merely an average of FOMC member projections. But financial markets were much more ebullient about rate cuts, especially because the Fed began with an emphatic 50 basis point cut instead of 25. The chatter snowballed quite a bit… “surely 50bp will be on the table at least one more time in 2024… and if we go 125bp in 2024, we might as well pencil in the same for next year.” So, at one point around a month and a half ago, the Fed Funds Futures market expected a full 250 basis points of rate cuts by the end of Q2 2025.
Needless to say, given the string of economic data listed above, expectations of monetary policy activity have been walked back considerably. Today’s 25bp rate cut is almost a given, but December’s projected 25bp cut is now in question, as is the projected 100bp pace for the 2025 calendar year. Now that the Fed has begun the process of easing monetary policy, fewer surprises are expected in today’s meeting, statement release, and press conference. In addition to the already difficult task of navigating data dependence and policy objectives, Fed Chair Powell will likely face more questions today on the task of maintaining political indifference, despite the potential of increased scrutiny by the executive branch.
The Decision
At the conclusion of today’s FOMC meeting, the Fed Funds rate was cut by 25 basis points as expected, moving the range from 4.75 – 5.00% down to 4.50 – 4.75%. It was a unanimous decision.
The Statement
This meeting’s Statement contained several amendments that are highlighted in the below chart.
The Press Conference
As expected, Fed Chair Powell artfully dodged questions related to the election and to potential fiscal policies during the forthcoming Trump administration. However, when asked if he would step down if Donald Trump asked him to, Powell’s answer was an emphatic “NO.”
Despite the recent stickiness of inflation, Powell stated, “We’re not declaring victory, but the story of inflation coming back down to 2% (albeit on a bumpy path) is still intact.”
He noted that the removal of the “greater confidence” language from the official statement was largely because this was their test for making the first rate cut.
Powell was very constructive on the U.S. economy during the press conference. He stated that “downside risks to economic activity have been diminished.” He later added, “We think the economy and our policies are both in a very good place,” and “It’s remarkable how well the U.S. economy has been performing.”
Ira Jersey, of Bloomberg Intelligence, said in response to Powell’s press conference, “Powell has continued to state that the pace and destination of the policy rate is subject to change. Ultimately, we think any incoming data that beats expectations will further reduce the odds of a December cut.”
The Market Reaction
Treasury yields were already falling this morning prior to the statement being released. Yields fell a further 2-3bp across the curve slightly during Fed Chair Powell’s press conference.
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