FOMC Watch – It’s time to slow down

There were three dissents in all. As usual, Miran dissented in favour of a 50 bps cut, but now Goolsbee joined Schmid, who already dissented last time, in favour of no cut. The dots showed that today's cut was still quite contentious. Six members put in no cut for this meeting (i.e., end of 2025), Miran putting in the two cuts, and the remaining twelve were in favour of today's cut. However, only four reserve banks put in a request for a cut in the discount rate, meaning eight of them didn't, including Chicago and Kansas City, the regions of the two dissenters. Not requesting the discount rate cut is a decision by the regional Fed boards, not the regional presidents, but still, it's suggestive of more push-back behind the scenes. The range of dots for next year is enormous, between an upper bound of 2.25 and 4.00. We had penciled in a shift to a median dot of 3.125, but that ended up one vote short and therefore stayed at 3.375.

We also got a new set of projections. Consistent with our own updates in the latest Global Outlook, the median estimate for growth next year is now 2.3%, up from 1.8% in September. Inflation was trimmed a bit from 2.6% to 2.5%. We expect higher inflation. They see 4.5% unemployment this year, edging down next after. We expect it to continue rising a bit more. The statement contained two important edits. First, they added 'In considering 'the extent and timing of' additional adjustments …' which all but rules out a January cut, consistent with our base case. Second, as was widely anticipated, after concluding the reduction of aggregate securities holdings in the last FOMC meeting, they will now re-initiate purchases of shorter-term Treasury securities to maintain an ample supply of reserves. Monthly amounts will be announced on or around the ninth business day of each month, with the first schedule released tomorrow, with a total amount of approximately $40 billion in Treasury bills, and purchases starting December 12th. In addition, standing overnight repo operations will now be conducted in a full allotment format, without an aggregate operational limit.

The most important remark in his opening statement was that the Fed is now 'within a range of plausible estimates of neutral,' opening the door for a pause. A second point was that the purchases of Treasuries may remain elevated for a few months before decelerating thereafter. They're immediately starting purchases, and the 'elevated' buying suggests they are really quite concerned about liquidity.

In the Q&A, he commented on the forecasts. He noted that the upgrade was largely based on supportive fiscal policy, and continued AI investment. He also noted a 0.2% shift from this year to next year because of the shut-down. Reflecting on cutting today after the October statement that 'when there's fog you slow down,' he noted that the labour market continues to cool. Unemployment is up 0.3% in the last three months. Non-farm payroll gains have been averaging about 40k since April, but they think that figure is overstated by 60k, making it an actual -20k. On inflation, he says that about half of the current overshoot is due to tariffs. In response to a different question, he noted he thinks pass-through will be complete by the first quarter of next year, although he admits it's a rough estimate. He doesn't see a hot economy that generates Philips-curve type of inflation. This view of downside risks to the labour market, and one-off tariffs shocks causing most of the overshoot on inflation is likely what ultimately drove today's cut. Regarding Treasury purchases, he noted that it was always going to build up. April 15th is tax day, where reserves always drop tremendously. They would need a period of frontloading to get reserves high enough anyway, but still, it comes in a little quicker than expected because of volatility in money markets.

The dots say one more cut, markets are pricing in two more cuts, we have penciled in three more cuts in the course of 2026. For now we maintain that base case, on the expectation of a continued gradual weakening of the labour market, and headline inflation being kept in check due to tailwinds from falling oil prices. Over the course of next weeks, we'll receive a great deal of data as post-government-shutdown data will start to come in, although these have limited reliability since a lot of data simply wasn’t collected. Our conviction for a January pause has strengthened, but we think an indefinite pause remains unlikely.