Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
The Federal Open Market Committee (FOMC) voted to cut the federal funds rate target range by 25 basis points (bps) to 3.50%–3.75%. There was one dissent in favor of a 50 bp cut, submitted by Governor Stephen Miran, and two dissents in favor of no change, submitted by Austan Goolsbee and Jeffrey Schmid.
Changes to the FOMC Statement:
- The Federal Reserve (Fed) revised its description of unemployment from "remaining low" to a recognition that the rate has moved up. It kept its assessment of inflation unchanged describing it as "somewhat elevated".
- On the balance of risks, the Fed continued to communicate that downside risks to employment have risen in recent months.
- The FOMC's forward guidance on the future policy rate was adjusted to clarify the "extent and timing" of additional adjustments.
- The Fed also added that they will initiate purchases of shorter-term treasury securities to maintain ample supply of bank reserves. In an additional statement released by the NY Fed, they announced reserve management purchases of 40 billion in Treasury bills starting on December 12th.
Summary of Economic Projections:
- Investors received FOMC participants’ outlooks for employment, growth, and inflation. Relative to September, participants generally upgraded their growth forecasts and reduced their inflation forecasts. They also reduced their unemployment forecasts slightly, but continue to show a convergence towards an equilibrium of around 2% growth, 4% unemployment, 2% inflation, and a 3% Fed Funds Rate over the next few years.
- The Core Personal Consumption Expenditures (PCE) inflation forecast was lowered to 3.0 in 2025, 2.5 in 2026, and maintained at 2.1 in 2027 and 2.0 in 2028.The number of participants who saw upside risks to their inflation forecast stayed at 12 out of 19 members.
- The Committee’s growth forecast was upgraded to 1.7 in 2025, 2.3 in 2026, 2.0 in 2027, and 1.9 in 2028. The longer run growth forecast was maintained at 1.8. The number of participants who saw downside risks to growth fell from 13 to eight out of 19 members, with three shifting to risks being broadly balanced and two shifting to risks being weighted to the upside.
- The unemployment rate forecast was maintained at 4.5 in 2025, 4.4 in 2026, lowered to 4.2 in 2027, and maintained at 4.2 in 2028 with longer run unemployment also remaining at 4.2. The number of participants who saw upside risks to their unemployment rate forecast fell from 15 to 13 out of 19 members.
- The median expectation for the path of the Fed Funds rate was maintained.
- The median member continued to expect one additional cut in 2026 followed by one more in 2027 ending at 3.125%, where it remains through 2028. The long run dot was also unchanged at 3%.
Key Quotes from Chair’s Press Conference:
- Current and expected policy stance:
- “So, I don't think that a rate hike is anybody's base case at this point. I am not hearing that. What you see is some people feel we should stop here and that we are at the right place and just wait. Some people feel we should cut once or more this year and next year, but when people are writing down their estimates of policy and where it should go, it is either holding here, or cutting a little or cutting more than a little.”
- A Divided Committee:
- “As I’ve mentioned here before, our two goals are in tension. Everyone around the table at the FOMC agrees that inflation is too high and that we want it to come down, and everyone agrees on the labor market. Where the difference lies is in how you weight those risks, what your forecast looks like, and ultimately where you think the bigger risk is. It’s very unusual to have this kind of situation. When you do, I think it’s actually what you expect to see, and we see it.”
- “The discussions are as good as any I’ve had in my time here. You have people who have strong views, and we come together and reach a place where we can make a decision. We made a decision today. We had nine out of twelve support it, so fairly broad support. But it’s not like the normal situation where everyone agrees on the direction and what to do. It’s more spread out, and I think that’s only inherent in the situation.”
- Labor Market and Growth Risks:
- “If you look broadly at outside forecasts, you do see a pickup in growth. It’s partly that consumer spending has held up. It’s been resilient. To another degree, it is that AI—spending on data centers and related to AI—has been holding up business investment. So overall, the baseline expectation for next year, at least at the Fed and I think with outside forecasters too, is a pickup in growth from today’s relatively low level of 1.7%.”
- “Available evidence suggests that most layoffs and hiring remain low, and both households’ perceptions of job availability and firms’ perceptions of hiring difficulty continue to decline. The official report on the labor market for September, the most recent release, showed that the unemployment rate continued to edge up, reaching 4.4%, and that job gains had slowed significantly since earlier in the year.”
- Inflation, Inflation Expectations, and the Impact from Tariffs:
- “Inflation has eased significantly from its highs in mid-2022, but remains somewhat elevated relative to our 2% longer-run goal. Very little data on inflation have been released since our meeting in October. Total PCE prices rose 2.8% over the 12 months ending in September, and excluding the volatile food and energy categories, core prices also rose 2.8%. These readings are higher than earlier in the year, as inflation for goods has picked up, reflecting the effects of tariffs. In contrast, disinflation appears to be continuing for services.”
- “With tariff inflation, there is the announcement of a tariff and then they start to take effect, and it takes some months with goods that might have to be shipped from other parts. It could take quite a while for an individual tariff to take its full effect. Once it has had that effect, the question is: isn’t that a one-time price increase? … If there are no new tariff announcements—and we do not know that, but let us assume that—inflation from goods should peak in the first quarter or so, right around roughly, and we have not been able to predict this with any precision. Call it the first quarter of next year should be the peak, and from here, it should not be big but a couple of tenths or less than that. We do not have precision on that. After that, if there are no new tariffs, then it will take nine months to get fully in, which is also an estimate. And then we see that coming down in the back half.”
Our View:
- The Fed followed through on its previous projection by cutting another 25 bps against a backdrop of weakening labor data and elevated but nonthreatening inflation. Since the October meeting, hiring data has remained soft for the large part, while firings remain low. Privately sourced consumer and business sentiment remains mixed while financial conditions have eased. There was no inflation data for the month of October, but the September PCE report came in softer than expectations. We expect the Fed to continue to look through tariff inflation and focus on wage and services disinflation instead.
- In the press conference, Powell retained the committee’s easing bias while allowing for flexibility and emphasizing data dependence on a meeting by meeting basis. Importantly, he indicated that rate hikes were not the base case and the risks were still skewed towards additional policy easing.
- We maintain our base case of sub-trend growth. Real gross domestic product in the first half of the year has averaged 1.6%. Growth in the third quarter continues to track at a moderate pace. Business investment in sectors such as technology and artificial intelligence (AI) remains robust, and the most recent personal consumption data has slowed but not stalled to a concerning pace.
- We maintain our trading range for the 10-year U.S. Treasury at 3.75%–4.25%. This yield range is supported by the Fed’s forecast to continue to gradually move the policy rate lower toward neutral, coupled with a weakening labor market, ongoing wage moderation, and continued service disinflation. The balance of risks to growth and yields could shift to be more two-sided in 2026 if the Fed’s delivered rate cuts in 2025 accompanied by accommodative fiscal policy re-orients the risks for the labor market towards re-acceleration next year. On the other hand, a pick-up in job layoffs would prompt the Fed to cut below neutral and result in a lower trading range for the 10-year U.S. Treasury yield.