Following the Fed’s announcement, find our latest market views from the Global Fixed Income Currency & Commodities (GFICC) U.S. rates team.
The Federal Open Market Committee (FOMC) voted to reduce the federal funds rate target range by 25 basis points (bps) to 4.25% – 4.50%. There was one dissent in favor of keeping the policy rate unchanged.
There was also a technical adjustment to the overnight reverse repo rate (ONRRP) which was reduced to 30bps bringing the rate level to the lower end of the Federal Reserve’s (Fed) target range.
Changes to the FOMC Statement:
- The economic assessment was unchanged. Labor market conditions have eased and the unemployment rate has risen but remains low. Inflation has made progress but remains somewhat elevated.
- The statement reaffirmed that the risks to their employment and inflation goals are “roughly in balance”. The statement added the phrase “the extent and timing” when referring to additional adjustments to the policy rate.
Summary of Economic Projections:
- The dot plot gave us a refreshed view of the Committee’s expectation for the path of the Fed Funds rate.
- The median member expects an additional 50bps of cuts in 2025, 50bps of cuts in 2026 and 25bps of cuts in 2027 which would put the policy rate at 3.125% by year-end 2027.
- The long run dot shifted higher again to 3%. In recent months, Fed members have discussed the possibility that the neutral policy rate (also referred to as R*) is higher than previously anticipated.
- Investors also received FOMC participants’ revised outlooks for employment, growth, and inflation:
- The 2024 economic forecasts were adjusted to reflect data already in hand of which has generally come in stronger than expected.
- Looking to 2025 and beyond:
- The Core PCE inflation forecast was moved higher to 2.5% in 2025 and 2.2% in 2026. The committee does not project reaching 2% until 2027. The number of participants who saw upside risks to their inflation forecast rose to 15 – the highest number of responses since December 2022.
- Growth forecasts were mostly unchanged reflecting stability around 2%. Longer-term growth estimates remain at 1.8%.
- The Committee also expects stability around 4.3% for the unemployment rate.
Key Quotes from Chair’s Press Conference:
- Current and expected policy stance: Becoming significantly less restrictive.
- “Let me start by saying why we cut today…I would say today was a closer call, but we decided it was the right call because we thought it was the best decision to foster achievement of both of our goal, maximum employment and price stability.”
- “We have lowered our policy rate by a full percentage point from its peak and our policy stance is now significantly less restrictive. We can therefore be more cautious as we consider further adjustments to our policy rate….at 4.3% and change, we believe policy is still meaningfully restrictive.”
- Explanation of the Change to the Statement: Appropriate to slow the pace of cuts.
- “Let me explain “extent and timing”. The sense of that wording is to make clear if the economy does evolve about as anticipated, we are at a point where it would be appropriate to slow the pace of rate cuts.”
- Conditions in the Labor Market and Inflation: Cooling gradually but still healthy.
- “Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than in 2019. The labor market is not a source of significant inflationary pressures.”
- “Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2% longer-run goal…We and most other forecasters still feel that we're on-track to get down to 2%. It might take another year or two from here. But I'm confident that's the path we're on.”
- “I feel really good about where the economy is. I'm very optimistic about the economy. And we're in a really good place. Our policy is in a really good place. I expect another good year next year.”
- Fiscal Policy and Tariffs: We don’t know much yet, so we take a more cautious approach.
- “We just don't know, really, very much at all about the actual policies. So it's very premature to try to make any kind of conclusion. We don't know what will be tariffed from what countries for how long in what size. We don't know whether there will be retaliatory tariffs. We don't know the transmission of any of that into consumer prices. To your point as well, I wouldn't say that we know whether the last episode is or is not a good model for what happened….We need to take our time, not rush.”
- “Some people did take a very preliminary step and start to incorporate, you know, highly-conditional estimates of economic effects of policies into and said so in the meeting. Some people said they didn't do so. And some people didn't say whether they did or not. So we have people making a bunch of different approaches to that. But some did identify policy uncertainty as one of the reasons for their writing down more uncertainty around inflation. And you know, the point about uncertainty is, it's kind of common sense thinking that when the path is uncertain, you go a little bit slower.”
Our View:
- The Fed has now cut 100bps since September. While the Fed still judges the current policy stance as restrictive (though significantly less so than before) and has retained an easing bias, it is prudent to slow the pace of rate cuts as we get closer to wide ranging estimates of the neutral policy setting.
- We expect the Fed to cut more gradually next year but still deliver two rate cuts. We and the market will need to remain flexible as we learn more about the new administration’s policy priorities and continue to monitor the flow of economic data.
- We maintain a wider trading range for the 10-year US Treasury (UST) yield of 3.75% - 4.75%. While strong growth and the prospects of changes to fiscal policy are upside risks to yields, still slowing hiring and a central bank that retains an easing bias should limit the magnitude in which yields can rise.