The Federal Open Market Committee (FOMC) voted to cut the federal funds rate target range by 25 basis points (bps) to 3.75% – 4.00%. There was one dissent in favor of 50 bps submitted by Governor Stephen Miran and one dissent in favor of no change submitted by Jeffrey Schmid.

Changes to the FOMC Statement:

• The Federal Reserve (Fed) evaluated that downside risks to employment remain elevated based on the limited available data amidst the ongoing government shut down.
• The Fed continues to note that inflation also remains high, but the balance of risks have shifted, justifying another cut in the policy rate.
• The Fed decided to conclude quantitative tightening beginning on December 1.

Key Quotes from Chair’s Press Conference:

• Current and expected policy stance:
  • “We haven’t made a decision about December and we’re going to look at the data that we have that affects the outlook and the balance of risks. I always say that it’s a fact that we don’t make decisions with advancement. I’m saying something in addition here. That it’s not to be seen as a foregone conclusion. In fact, far from it”
  • “I think for some part of the Committee, it is time to maybe take a step back and see whether there really are downside risks to the Labor Market, see whether, in fact, the growth -- the stronger growth we are seeing is real.”
•  A Divided Committee
  • “It’s divided. And when you’re this divided it’s difficult to provide guidance about what you’re going to do next. Because if you’re trying to lead this committee, trying to reflect the consensus that doesn’t exist is basically impossible”
  • “You saw we had two dissents, one for 50 and one for no cut. There was a strong solid vote in favor of this cut. The strongly differing views were really about the future, what does that look like? I think people are saying, you know, they’re noticing stronger economic activity, forecasters generally, broadly, have raised their economic growth broadcast for this year and next year, in some cases quite materially. In the meantime we see a labor market that’s kind of—I don’t want to say stable, but it’s not clearly in motion. It’s not clearly declining quickly in any case. It may be just continuing to gradually cool. And again, people have different forecasts and expectations about the economy and different risk tolerance. So you read the SEP, the speeches, you know there are differing views on the committee and to the point where I said what I said”
  • “Everybody on the committee is deeply committed to doing the right thing to achieve our goals. Maximum employment and stable prices. You have differences on how to do that. As mentioned, some of that is different forecasts. But a lot of it is also different risk aversions to the different variables which is common through all Federal Reserves. People have different risk tolerances. That leads to people with disparate views. We’re at a place where we have cut two more times and now we’re 150 basis point closer to neutral than we were a year ago. And so there’s a growing chorus now of feeling like maybe this is where we should at least wait a cycle, something like that. That’s what it is. The just what you think it would be. And again, you’ve seen in the September Summary of Economic Projections, you’ve seen this in the public remarks of FOMC participants and now I’m telling you that’s what you can expect in the minutes and I’m just telling you that’s what happened in the meeting”
• Labor Market and Growth Risks:
  • “We do not see the weakness in the job market accelerating. I would say, again, we don’t have—we didn’t get the September employment report, payroll report, but we do get—we look at unemployment insurance claims, initial claims are reported at the state level and we still get those and we accumulate them and get the national number and there’s really—you can look at the numbers. Same thing with the job openings we get from Indeed. There’s no story over the last four weeks. Its stable. You don’t see anything that says that the job market is or any part of the economy is making a significant deterioration.”
  • “Job creation is very low. And the job finding rate for people who are unemployed is very low. But the unemployment rate is very low as well. 4.3% is a low unemployment rate. When you’re in a situation where job creation, if you adjust for likely overcounting in the way that BLS does its work, is pretty close to zero. So maximum employment doesn’t—on a sustainable basis, if you’re creating zero jobs, if it’s an equilibrium, if it’s in balance, it’s a pretty curious balance. I thought as many of my colleagues thought and you’ve seen the last two meetings that it was appropriate for us to react by supporting demand with our rates and we’ve done that. We’ve reduced so that rates are looser. I wouldn’t say that they’re accommodative right now. But they’re meaningfully less tight than they were. And that should help so that at least the labor market doesn’t get worse. It’s a complicated situation and some people argue that this is supply and we really can’t affect it much with our tools. But others argue as I do that there is an effect from demand and we should use our tools to support labor market when we see this happening.”
• Inflation, Inflation Expectations, and the Impact from Tariffs:
  • “Nontariff inflation is not too far from 2% now.”
  • “Higher tariffs are pushing up prices in some categories of goods, resulting in higher overall inflation. A reasonable base case is that the effects on inflation will be relatively short-lived—a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed. Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem. In the near term, risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation.”’

Our View:

• The Fed stuck to its September projections by cutting another 25 bps against a backdrop of a soft labor market and still elevated but nonthreatening inflation. Since the FOMC last met, the federal government has entered an extended shutdown that has led to a pause in most published economic data. Privately sourced consumer and business sentiment remains mixed despite uncertainty surrounding tariffs having decreased and financial conditions having eased. Available labor market indicators remained soft in October as well. With September Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS), the September Personal Consumption Expenditures (PCE) report is also expected to come in softer, showing tariff passthrough remains contained within specific Core Goods subcomponents meanwhile services disinflation if offsetting the rise.  We expect the Fed to continue to look through tariff inflation and instead focus on wage and services disinflation.
• In the press conference, Powell pushed back on market pricing of a December rate cut. We believe that Powell did so to increase optionality for December in an effort to represent the broad range of views that the committee members currently hold. Our interpretation of the press conference was that Powell still views policy as restrictive and that downside risks to the labor market continue to outweigh inflation, but there is much debate on this within the committee and Powell hoped to represent the broad range of views in the conference.
• 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 AI remain robust and the most recent personal consumption data has slowed but not stalled to a concerning pace and remains healthy.
• We have adjusted the upper end of our trading range for the ten-year U.S. Treasury lower (3.75% – 4.25%). This yield range is supported by the Fed re-initiating its cutting cycle towards 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 delivers expected rate cuts, which supported by accommodative fiscal policy and easy financial conditions results in a re-tightening of the labor market. On the other side of the ledger, should we see layoffs pick up that prompts the Fed to cut below neutral, we expect the ten-year U.S. Treasury yield to move into a lower trading range.

Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results orperformance may differ materially from those reflected or contemplated.