As widely expected, the Fed lowered the federal funds rate (FFR) by 25 bps today. It has lowered the FFR by 75bps since September of this year. Since the start of the current easing cycle in September 2024, this rate has declined by 175 bps to 3.50%-3.75%.
In his prepared remarks at today’s press conference, Fed Chair Jerome Powell rightly observed the obvious: "The adjustments to our policy stance since September bring it within a range of plausible estimates of neutral and leave us well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks."
On average, Fed officials believe that the neutral federal funds rate is 3.00%. Two more 25bps rate cuts in 2026 would bring it to neutral. However, monetary policy should remain relatively restrictive until inflation falls to the Fed's 2.0% target. Powell seems to believe that will happen in 2026. Powell repeated his new "well positioned" mantra a few times, suggesting that the Fed might pause rate cutting for a while.
Stock prices rose on the news, which was widely described as a "hawkish rate cut." Bond yields edged a bit lower, but the 10-year Treasury bond yield remained above 4.00%, at 4.13%. Financials were especially strong today, as the yield curve continues to steepen.
There were three dissenters at the latest FOMC meeting: two opposed to today's rate cut and one calling for a 50bps cut. According to today's dot plot, three of the 19 FOMC participants estimate that the FFR is now below their neutral-rate estimates (chart). Seven of them expect no more rate cuts in 2026.
The Summary of Economic Projections (SEP) shows that the median estimate of the 19 participants is that the FFR will fall to 3.40% next year and 3.10% in 2027 (chart).
In his press conference, Powell said that the inflationary impact of Trump's tariffs should decline by next year. The SEP's median inflation forecast aligns with his view (chart). The PCED inflation rate is expected to fall from 3.0% this year to 2.5% next year and to 2.1% in 2027.
