With not much to go by hard-data-wise in the initial paragraph on the economy, the Fed repeated that “economic activity has been expanding at a moderate pace.” Bottom line: While we knew exactly what the Federal Reserve was going to do (cut rates by 25 basis points) because John Williams told us recently, it still is a very tricky time for the Fed in balancing their two mandates, notes Peter Boockvar, editor of The Boock Report.
They only have jobs data from the Labor Department through September, so they said “the unemployment rate has edged up” as of then and “more recent indicators are consistent with these developments.” They repeated that “inflation has moved up since earlier in the year and remains somewhat elevated.”
Everything else in the statement was the same seen in September. Stephen Miran again wanted a 50 bp cut and Jeffrey Schmid dissented again against any cut, now joined by Austan Goolsbee. Susan Collins gave in, as did Alberto Musalem, voting for a cut even though they both hinted a few weeks ago that they wanted to sit tight.
With respect to the Fed’s “dot plot” projections, the real rate long-term expectation remained at 1%...and they are now slightly below that. They tweaked down by one-tenth their 2025 inflation forecast to 2.9% headline and 3% core, versus 2.8% for each seen for September’s data.
With next year, the dots only show one more cut to a median of 3.4%, coincident with their 2.4% PCE forecast headline and 2.5% core – thus holding to the 1% REAL rate. They also raised their 2026 GDP forecast to 2.3%, while keeping their unemployment rate estimate at 4.4%.
Lastly, the Fed will step up their purchases of T-bills “and if needed, other Treasury securities with remaining maturities of three years or less to maintain an ample level of reserves.” No, this is NOT QE – but I’m not clear on why the Fed is doing this, outside of just naturally growing the balance sheet in line with nominal GDP.
I would argue that policymakers are still missing on one mandate (inflation), which is resulting in softness in the other (employment). That’s the difficulty of having a dual focus. As long as Powell is Fed chair, I’ll say again that I think he’s done cutting rates UNLESS inflation decelerates from here and/or unemployment takes another leg higher. Once he’s gone, of course, all bets are off.
