FOMC Meeting

Bottom Line:

The Federal Reserve (Fed) lowered the federal funds rate by 25 basis points, as expected while changing its expected fed funds rate cuts for 2025 onwards. It now expect just two cuts in 2025, two cuts in 2026, and one cut in 2027. The Fed is ‘extending duration’ or extending the period it will take to bring inflation down to the 2.0% target compared to what it had expected. Today’s cut was a ‘hawkish cut’ where the Fed accepted that it would take a longer time to bring down inflation. At the same time, the Fed Chairman indicated that today’s decision was a “close call.” This is the first time the Chairman has indicated that the decision was more difficult than expected.

The Chairman indicated that the presidential election result was not behind the decision to reduce the pace of cuts in the coming years. The Fed’s decision was due to the higher inflation over the last several months. That is, it seems that Fed officials are following the path they followed at the beginning of last year when inflation was higher than expected and they decided to postpone the start of the rate cut cycle.

Observations:

The Fed lowered the federal funds rate by 25 basis points to 4.25%-4.50%, as expected while changing its expectation for rate cuts for next year from 100 basis points to just 50 basis point and another 50 basis points in 2026. In 2027, it expects to lower the federal funds rate by 25 basis points. The Fed moved the longer run fed funds rate slightly higher, to 3.0% compared to a September estimate of 2.9%.

Although all the members of the board of the Federal Reserve voted to lower the federal funds rate, the president of the Federal Reserve Bank of Cleveland, Beth M. Hammack, dissented and wanted to keep the federal funds rate unchanged.

The Fed’s Summary of Economic Projections (SEP) also increased its projected GDP growth for 2024 to 2.5%, year-over-year, from a 2.0% rate in September, while moving its 2025 projection slightly higher, from 2.0% to 2.1%. The Fed kept the projection for 2026 at 2.0% and lowered the projection for 2027 to 1.9% from 2.0%.

The SEP also lowered the rate of unemployment for 2024, from 4.4% in September to 4.2% while lowering the 2025 rate of unemployment from 4.4% to 4.3%.

The most important changes to the Fed’s projections were for the rate of inflation, which in 2024 increased from 2.3% to 2.4% while the rate for 2025 increased from 2.1% to 2.5%. For 2026 the rate of inflation increased from 2.0% in the September SEP to 2.1% today while it expects inflation to hit the target in 2027, at 2.0%. Similarly, the Fed now expects the core PCE to hit the target in 2027. It pushed the core PCE to 2.8% in 2024 from 2.6% in the September SEP while increasing it to 2.5% in 2025 compared to an expectation of 2.2% in the September SEP. For 2026 the Fed now sees core PCE at 2.2% compared to 2.0% in September.

Comments from the Press Conference:

Economy expanding at a solid pace
Consumer spending has remained resilient
Housing market has remained weak
Labor market remains solid
Unemployment rate remains low even as it has increased during the last year
Labor market is not a primary reason for higher inflation
Inflation remains elevated compared to the 2.0% target
Longer-term inflation expectations remain well anchored
The Fed is not on a pre-set path, it will depend on incoming data
Today’s cut was a close call
We don’t need further cooling in the labor market to keep inflation contained
Twelve-month inflation is moving sideways today
Slower pace of cuts next year reflects both the higher inflation we have had this year as well as higher inflation for next year compared to before
To cut further after this cut we need to see further improvement in inflation as well as the stance of the labor market
The economy and policy are in a good place today
What is driving the slower rate cuts in 2025? Growth is stronger, inflation is higher, and we are closer to the neutral rate
Some members indicated higher uncertainty on the path forward
Inflation has underperformed compared to expectations and this was the reason why the change in the path forward for policy. The elections did not affect this decision.
We will wait to see what the new administration’s policies, i.e., tariffs, are in order to make the appropriate changes to policy
We are on track to get to 2.0%. It may take one or two years more than we had expected

Summary of Economic Projections

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