FOMC meeting, November 6–7

Meeting recap

Gradualism and risk management in a brave new world

The Federal Open Market Committee (FOMC) voted unanimously to cut the federal funds rate by 25 basis points (bps) to 4.50%–4.75%. Given robust but gently decelerating economic activity, strong productivity growth and softening inflation, we continue to expect a 25bps cut to 4.25%–4.50% in December. Thereafter, we believe the Fed may decide to slow the recalibration process as policymakers more carefully feel their way to a neutral policy stance. Considering the US election results, we now assume a rate cut at every other meeting in 2025, for a total of 100bps of easing, down from 150bps previously.

Policy statement alterations were initially perceived as having a hawkish tilt but instead were aimed at providing the Fed with greater policy optionality. Fed Chair Jerome Powell stressed there was no policy signal in the removal of the statement, saying the FOMC “has gained greater confidence that inflation is moving sustainably” to 2%, and that “further” progress toward 2% and balanced risks had motived the rate cut. Instead, these were viewed as tests for the first rate cut, not the continuation of the easing cycle. 

There was no update to the Summary of Economic Projections (SEP) or the dot plot of median rate expectations, but Powell did provide some hints as to how he perceived the outlook. He noted that in aggregate economic activity had been stronger than expected, following National Income and Product Account revisions to GDP and income; that downside risks to growth were lower; and that inflation had come in a little stronger than expected. 

As such, he noted that we are still “on a path toward a more neutral stance,” adding “that has not changed at all since September.” This would seem to confirm that absent any major economic surprise over the next six weeks, the Fed will proceed with a 25bps cut in December.

The five key takeaways from the press conference were:

1. “No,” Powell has no intention to resign or leave the Fed if president-elect Trump asks him to do so. Powell stressed that it’s “not permitted under the law” for the president to fire or demote the Fed Chair or any governor at will. As a reminder, Powell’s four-year term as Fed Chair expires in May 2026, but his 14-year term as governor ends in 2028.
   
   
2. Powell largely deflected questions about the election results and hypotheticals around the outlook for fiscal, trade and regulatory policy, saying, “We don’t guess, we don’t speculate, and we don’t assume.” He did, however, acknowledge that policies implemented by the president or Congress could affect the Fed’s pursuit of its dual mandate and require it to react. 
   
   
3. Powell reiterated that with an appropriate recalibration of monetary policy, the Fed believes it can maintain the strength in the labor market even as the still-restrictive policy stance enables further progress toward 2% inflation. 
   
   
4. Powell appears to be increasingly believing in the durability of a pro-cyclical acceleration in productivity, noting that “we’re five years into a nice set of productivity readings, which are sustained and very healthy.” As we have stressed, even though wage growth remains higher than pre-pandemic, it’s no longer inflationary given current productivity readings.
   
   
5. When asked about the run up in long-term yields — the 10-year Treasury yields are up 70bps since the Fed’s 50bps cut in mid-September — Powell noted that the rise was not principally due to higher inflation expectations but rather “a sense of stronger growth and perhaps less in the way of downside risks.” He argued that the Fed would lean against higher yield only if it led to a “persistent” tightening of financial conditions.