Energetic backpedal from the aggressive monster-rate-cut trajectory envisioned by the markets three months ago.
By Wolf Richter for WOLF STREET.
The FOMC voted today to cut the Fed’s five policy rates by 25 basis points, with 1 participant dissenting, (Cleveland Fed president Beth Hammack who preferred no cut).
And participants see only two cuts in 2025, after economic growth, labor market growth, consumer income and spending, the acceleration of inflation, and big up-revisions of the data this fall have changed the scenario from that infamous soft landing to cruising at a fairly high altitude at an above average speed.
The FOMC also lowered by an additional 5 basis points the offering rate of its Overnight Reverse Repos (ON RRPs), which takes the offering rate to the bottom of the range of its rates (4.25%). The minutes of its last meeting disclosed discussions to that effect. We’ll mull this over in a separate article later, but briefly:
This adjustment will encourage money market funds that use ON RRPs to find other places for their cash, such as the repo market, which would ultimately drain ON RRPs faster to near-zero and shift liquidity to reserves, so that the Fed can continue QT for longer before reserves drop to the “ample” level at which the Fed has said it would end QT.
The 25-basis-point cut reduced the Fed’s five policy rates to:
- Target range for the federal funds rate to 4.25% – 4.50%.
- Interest it pays the banks on reserves: 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 4.25%
- Interest it charges on overnight Repos: 4.50%.
- Primary credit rate: 4.50% (banks’ costs of borrowing at the “Discount Window”).
QT continues at the pace announced in May. The Fed has already shed $2.1 trillion in assets since it started QT in July 2022. According to the FOMC’s Implementation Notes today, the Fed will continue to shed Treasury securities and MBS under the current caps.
The “dot plot.”
Today’s meeting was one of the four times per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plots.” The prior SEP came out with the monster-cut meeting in September.
For the SEP, each of the 19 participants jots down where they see the Fed’s policy rates, unemployment rates, GDP growth, and PCE inflation by the end of the current year and by the end of each of the next several years. The median value of these projections becomes the headline “median projection” for that metric. These projections are neither a decision nor a commitment by the Fed. Members change their projections as the economic situation changes.
Interest rates: only 2 cuts in 2025. Today’s cut reduced the midpoint of the target range for the federal funds rate to 4.375%.
Today’s median projection for the end of 2025 rose by 50 basis points from three months ago, to 3.875%, so only 2 cuts of 25 basis points each in 2025, compared to the 4 cuts they had envision for 2025 in the September SEP, reflecting the Fed’s backpedal from the aggressive monster-rate-cut trajectory envisioned and hoped-for by the markets three months ago.
Projections by the 19 FOMC members for the midpoints of the federal funds rate by the end of 2025 (bold = median):
1 sees 4.375%: No cuts
3 see 4.125%: 1 cut of 25 basis points
10 see 3.875%: 2 cuts of 25 basis points
3 see 3.625%: 3 cuts of 25 basis points
1 sees 3.375%: 4 cuts of 25 basis points
1 sees 3.125%: 5 cuts of 25 basis points.
The “longer-run” federal funds rate keeps rising. The median projection for the “longer-run” federal funds rate beyond 2027 rose to 3.0%, up from 2.9% at the September meeting, up from 2.8% at the June meeting, and up from 2.6% at the March meeting.
At the same time, it sees PCE inflation at 2.0% beyond 2027. In other words, over the longer term, it sees its interest rates to be 1 percentage point higher than PCE inflation.
GDP growth: The median projection for real GDP growth for 2024 rose to 2.5% (from 2.0% in the September SEP). For 2025, the GDP growth projection rose to 2.1% (from 2.0%), and 2026 remained at 2.0% (which is the 15-year average real GDP growth of the US).
Unemployment rate: The median projection for the unemployment rate declined to 4.2% by the end of 2024 (from 4.4%). For 2025, the median projection declined to 4.3% (from 4.4%).
Inflation rate: The median projection for “core PCE” inflation by the end of 2024 rose to 2.8% (from 2.6%). For the end of 2025, it rose to 2.5% (from 2.2%).
Overall PCE inflation is seen rising to 2.5% in 2025, higher than it is now (2.3% in October). No 2.0% in sight until 2027.
What changed in the FOMC’s statement:
The statement changed in only in two ways in the third paragraph, and the rest was unchanged.
Replaced the old rate with the new rate: “…to 4-1/4 to 4-1/2 percent.”
New: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate,” which replaced the old: “In considering additional adjustments to the target range for the federal funds rate…”
The whole statement:
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.
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I would love to have been wrong, but as I said a few days ago:
“I have faith in the FOMC to take a hard, clear-eyed look at the data in front of them–reaccelerating consumer goods inflation, stubbornly high consumer services inflation, massive upward PPI revisions, a much tighter labor market than apparent a few months ago, a screaming AI and crypto bubble–and, after soberly analyzing it, do the wrong thing.”
At least there was a single dissent, unlike last meeting.
This was a hawkish move: seeing only 2 cuts next year (instead of 4), seeing higher inflation and higher longer-run rates.
S&P 500 down 1.1% at the moment.
Wolf, I shorted Tesla today at $473. It got as high as $488. Used double-short etf TSDD.
Yes, they have levereged ETFs for single stocks now. I’m using one for Nvidia – double-short NVD.
Now we wait.
Yes, I’m sure this will be the “hawkish” move that kills the bubbles and the persistent services inflation, unlike all of their other recent “hawkish” moves.
Indeed. And the bond market doesn’t even believe that, pricing in no cuts at all this year.
This is wild. Fed futures are now predicting a nearly certain chance of a quarter point raise at the Jan meeting, and no change to the curve rate by the end of 2025
FUN FACT : There are 8 US stocks that are worth combined $20 Trillion.
Nothing that a good rate cut can’t fix.
Not happening today, that rate cut is crushing stocks.
10-year yield spiked by 11 basis points to 4.51% currently.
With rate cuts like these, who needs rate hikes?🤣
But Wolf, aren’t you the one who thought the Fed was getting it right this time? I am older than you, and remember well when tall Paul really tightened, and we had a short recession afterwards, but he killed inflation for 40 years. It took some real heaving of money into the system to reignite it. The federal funds rate, as found on FRED would indicate that this rate tightening by the Fed wasn’t that much tighter than we’ve had during routine times since 1980. I read your column frequently, and find that you do your homework, but I did think there was a little bit of bromance with the Fed in your musings this time.
FUN FACT: Tesla added $13.5 Billion in value per day for 60 days (for a combined value of $0.8 Trillion in 2 months).
Another way to look at it…Tesla added the market cap of Ford every 3 days during this 60 day period.
Ford market cap = 40 Billion
Tesla market cap = 1.5 Trillion
Just crazy irrational exuberance.
And today it lost the value of 3 Ford Motor Companies in 2 hours.
– 120 Billion lost today
Nothing to see here….
I know the narrative is for all to claim this A hawkish move.
A hawkish move is when they move, they moved and lowered rates 25 bp. Their views on the future could be considered hawkish to some, to me not so much since they could change their minds by tomorrow morning….but whatever, a dove, a hawk, a flying pig….
Seems they’re trying to assuage all of the above….dove, hawk and the flying pigs.
I’m left wondering how much inflation would have to re-accelerate for the Fed to put an increase back on the table…
If annual core PCE inflation (now 2.8%) gets closer to its policy rates (still over 4%), you’ll hear it talk about rate hikes again.
With inflation trending up and the Fed continuing to lower rates, it might not take long for those values to meet in the middle.
I’m also curious how Trump will exercise his new unlimited immunity for “official acts” in relation to taking control of the Fed.
We know Trump wants lower rates, he’s said so many times, including the last time he was in office.
He can’t *fire* Powell, but now he can, or at least threaten to, *remove* him by any means necessary with zero repercussions.
Trump can blame Biden for inflation for a while, but eventually, if inflation stays high or goes higher, he owns it in the eyes of the American public, and Americans hate, hate, hate inflation. So Trump will be better off by making sure the Fed can do what it needs to do get and keep inflation down.
Inflation adjusted Fed funds rate has been around 2% for about 18 months now. That’s the highest since 2008 and typical of historical rates during good economic periods, consistent with an attempt to cool the economy but not drastically.
My guess is that the Fed would be very content with 2-3% inflation and 4-5% Fed funds rate until the economy starts to struggle.
TNX = blast off higher….
“Arif Husain is the head of Global Fixed Income and Chief Investment Officer (CIO) of the Fixed Income Division of T. Rowe Price. He is also a member of the firm’s Management Committee. Husain holds a B.Sc. (honors) in banking and international finance from the City University London, Cass Business School. When Husain speaks, Wall Street listens.
What Husain has been saying since October is that the U.S. is on a collision course with higher interest rates.”
Husain is calling 5+ and perhaps 6% tnx …
that should fire hose some seriously cold water on home buyers
REITs wreck … film at 11!
“Cleveland Fed president Beth Hammack who preferred no cut”
So one of them gets it.
Agreed. I think Hammack is right.
It really is something that huge industries like cre and residential resale can be frozen yet everything is awesome. Seems like there will be an inflection point when folks least expect it. I know that Wolf has been beating the higher for longer drum forever. But has anybody *really* believed it?
“…yet everything is awesome.”
No one with a brain says that. But OVERALL, the economy is growing at a very solid pace, DESPITE the issues in RE.
Market currently crashing and ever index down by over 1%.
Will this be enough to turn off the AI/Crypto hype trains and quiet the real estate crowd?
I’m sure Lawrence Yun can somehow spin it.
Here is was in November….
“NAR Chief Economist Lawrence Yun Forecasts 9% Increase in Home Sales for 2025 and 13% for 2026, with Mortgage Rates Stabilizing Near 6%”
Sales could very well rise by 9% in 2025 from the 30-year low in 2024. But they’d still be very low.
Precisely. Spin doctors can use percentages without actually telling a fib. They just don’t show Wolf’s graphs.
i doubt it. if i had to bet, i’d bet housing sales drop even more.
buyers are now projecting price drops, so many are waiting.
No.
Down 1-2% is a normal orderly decline.
“Crashing” is a drop more like 5-10%.
We may yet see “crashing” but odds are against it, not for this situation. If earnings start to smell bad in the New Year, though….
Maybe not a crash but now NASDAQ is over 3% down in only a few short hours.
A 30% drop in a week would be a good start.
Trying to learn:
Is this the rate that the Federal Reserve is saying should be 2% along with inflation?
No, the Fed INFLATION target is 2%. Its policy INTEREST rates are much higher, now at 4.25%-4.50%.
Its longer-run INTEREST rate projection beyond 2027 is 3.0% if INFLATION is at 2.0%. So longer term, it sees its interest rates as being 1 percentage point higher (3%) than inflation rates (2%).
Excellent.
Thank you for the correction/information.
The fed wants 2% inflation….they say that constantly like wishing a toy from Santa.
I would like to be 25 years younger with two beautiful wifes, living by the ocean with a black cat purring in my arms…
Flying reindeer…2% inflation..
This is at odds with Trump pumping zero rates —
Market down 600 Points as we speak, heading for a possible 800 point loss as stop losses are triggered. BidenIflation is alive and well, and the Fed should NOT have cut rates. They are wrong now just as they were wrong in 2022.
The Fed’s past mistakes are catching up with it. When they reduce the short term rate, the 10 year rate now INCREASES. Its a clear sign the Fed is losing control of long rates. Notice the nice pop in the 10 year rate after the Fed’s announcement today.
The question is, will the Fed allow price discovery caused by an increasing long term interest rate, or will they try to avoid it with another round of QE as recession threats appear?
In any case, within a few months, I expect to hear an announcement about the ending of QT . The rise in long rates makes the Fed very nervous. All kinds of crazy notions and programs could be around the corner.
I hope they stick to providing emergency liquidity in times of trouble, as Wolf proposes, but I view that as an unlikely scenario.
“When they reduce the short term rate, the 10 year rate now INCREASES.”
Perhaps just the yield curve normalizing rather than an out of control bond market.
Mr. Market told me (well in advance):
– The FED was to cut rates 25 basispoints.
– No new rate cuts in the near future.
The Fed told you in advance…
I might buy some more NVDA if the discount gets juicier. This is a normal correction. We’ll be back up before EoY
Are we allowed to say that at this point, the yield curve is now un-inverted?
I realise the 20 year is still higher yielding than the 30 year, but everything else seems to be in line. Longer terms are higher yields.
If so, does that signify anything at all?
It used to foreshadow a recession.
These days? Perhaps not
no, the curve inverting signaled a recession. not uninverting.
An inverted yield curve has often preceded recessions, average 12 months or so. The un-inversion is often associated with the recession. Poor choice of words on my part.
Powell like to say their decisions are data driven. So what is the secret data? The available data has nothing indicating a rate cut is on order. Another quarter of such data and a rate increase is on order.
The Fed has had a very asymmetrical response for several decades now.
So cut is in anticipation and hikes are when they see the eyes of inflation.
I would assume this trend will be permanent because of fiscal and monetary conditions. Both Fed and government have used up most of the ammunition. So they have tools to cool but not enough to restart the economy.
It’s like getting a giant box of candy for Christmas from your doctor with a note attached “You need to schedule a test for diabetes in the new year.”
What we really need, is a good old-fashioned double-barrel blast of QE, including MBS acquisition.
Now we wait for the Depth Charge tirade.