Christian Hoffmann shares his perspective on the Fed’s stance and the potential impact of monetary policy.
Details of the Fed Announcement
The FOMC cut rates 25 basis points, and its target range dropped to 4.00-4.25%, representing the first cut in 2025. The Fed signaled that two more cuts might be on the way before the end of the year at the two remaining meetings (October and December). The committee noted recent sluggishness in the labor market in its post-meeting statement. “Job gains have slowed, and the unemployment rate has edged up but remains low,” which also detailed that economic activity has “moderated” and inflation “has moved up and remains somewhat elevated.”
Christian’s Views
The FOMC cut rates by 25 basis points to 4.00-4.25%, which was our base-case expectation. The market grappled with some probability of a 50-basis point cut, which likely would have caused a more outsized market reaction. Bonds responded positively to start, likely driven by a dovish 50 basis points of additional cuts for 2025. All this comes against a macro backdrop with fairly hawkish and largely unchanged forecasts. Unsurprisingly, the Fed noted that the downside risks to employment have risen.
New board member, Stephen Miran, was just sworn in and dissented. Given his very public views and posturing, any other action would have been surprising. Dissents from Bowman and Waller were a toss-up in our view, and somewhat surprising that we didn’t get at least one additional dissent. I might chalk that up to legacy members pushing back against outside influence or a revised outlook from retail sales data. Additionally, I think markets have been too sanguine about the increasingly politicized and potentially less independent Fed. If dissents become the norm, we are moving away from the long precedent of a consensus-driven Fed to something maybe entirely different.
We have to ask if this is a paradigm shift. Has the reaction function changed? Should we start to price in new members to the FOMC that align with Miran’s very different views?
Key Takeaways
The central bank’s dot plot, which shows individual members’ anonymous expectations, indicates a median estimate of 3.4% for the federal funds rate at the end of 2026. That compares to a median estimate of 3.6% for the end of this year. However, the Fed is projecting only one rate cut in 2026, which is less than expected, according to its median projection. A single quarter-point reduction next year is significantly more conservative than the current pricing of two to three cuts next year. The forecasts, however, showed a wide range of opinion, with two voting members seeing as many as four cuts and three officials expecting three rate reductions next year.
Fed Chair Powell commented in his press conference after the decision characterizing the move as a “risk-management cut,” insinuating the move was more of an insurance cut in case the economy dramatically slowed. “There are no risk-free paths now. It’s not incredibly obvious what to do,” Powell said.
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