Beautiful Interest Rate Cut
The market climbed into the close on Wednesday after the Fed delivered the rate cut everyone expected.
MACRO NEWS
FED CUTS RATES
The Federal Reserve's Federal Open Market Committee delivered a widely expected 25 basis point rate cut, bringing the new target range for the Federal Funds Rate to 3.5% / 3.75%. Powell said that economic activity is expanding slowly, job gains have slowed, and the unemployment rate has edged higher, but inflation has mostly stayed put.
It’s the final rate cut this year, and final cut we may see under Powell’s watch, who did his best to organize a divided vote. He had his work cut out for him, and based on the split forward-looking projection, Kevin Hassett, or whoever takes Powell’s job in May, is in a tough spot too.
Betsey Stevenson, professor at the University of Michigan School for Public Policy, said people don’t care about the ‘inflation rate’ as much as media and policymakers do. Americans are frustrated with the price level: the prices of goods like food and rent are irreversibly higher. Keeping inflation in check slows the climb, but it doesn’t bring prices down.
She told Bloomberg Businessweek that Powell tried to tell the press corps that focusing on healthy employment is the only way to make Americans feel better.
The most crucial takeaway from the meeting was the Dot Plot summary, which shows how individual members see inflation, growth, ect in the future. And boy, what a mess.
The median projection among policymakers calls for only one 25-basis-point cut in 2026. It’s a "hawkish” tone that sends the message that the Fed is cutting now solely to support the labor market, but is otherwise scared inflation is not yet under control.
2026 Forecasts: Unemployment at 4.4% and PCE inflation at 2.4%, and a 3.4 FFR.
The Conflict: The Fed expects inflation to be near its 2% goal, but it also anticipates a deteriorating labor market, which argues for more aggressive cuts than the single cut projected.
For the first time since 2019, the decision was met with three dissents, marking a clear split in the committee:
Trump’s recent Fed Governor pick, Stephen Miran, voted against the cut, preferring a larger 50-basis-point reduction, arguing that labor-market weakness necessitates a bolder move.
Austan Goolsbee & Jeffrey Schmid: Both voted to hold rates steady (no change), likely prioritizing the fight against inflation, which remains above the 2% target.
The future-looking Dot Plot further showed that three or more voting members even saw rates going UP next year! Looking ahead, one member (likely Miran) foresees as many as five rate cuts in 2026, down to a 2.0% target rate. This widening range of views underscores the high-stakes debate over the future of monetary policy ain’t over yet.
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