Amid only one dissent, FOMC Cuts by 25 basis points. “Dot Plot” sees 50 basis points in additional cuts in 2025. Risks shift to labor market. QT continues.
By Wolf Richter for WOLF STREET.
The FOMC voted today to cut the Fed’s five policy rates by 25 basis points, the first cut in 2025, after cutting by 100 basis points in 2024, which then had caused long-term yields to spike by 100 basis points as the bond market fretted about accelerating inflation amid a lax Fed.
The FOMC cut its five policy rates:
- Target range for the federal funds rate to 4.0%-4.25%.
- Interest it pays the banks on reserves: 4.15%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 4.0%
- Interest it charges on overnight Repos at its Standing Repo Facility: 4.25%.
- Interest it charges banks to borrow at the “Discount Window” at 4.25%.
In addition, the FOMC voted to continue QT at the current pace.
There was only one dissent: The New Guy.
One out of 12 voting members on the FOMC dissented and voted against the 25-basis point cut: Stephen Miran, hastily sworn in yesterday, wanted a 50-basis point cut. He replaced Adriana Kugler who didn’t show up to the last meeting and then quit.
In theory, dissents are good. This endless strive for unanimity under Powell bred the false impression that everyone agreed even when there was a lot of disagreement and uncertainty about everything.
Who didn’t dissent but could have: Governors Michelle Bowman and Christopher Waller. Bowman and Waller had already dissented at the July meeting, wanting a 25-basis point cut, when the Fed held rates. Appointed by Trump 1, they are now vying for Powell’s job. Trump wants rate cutters in that job. But they voted with the majority and maybe were thereby able to nudge the wording of the Statement into their direction – such as the shift of the balance of risks to the labor market, and away from inflation.
Trump tried to get governor Lisa Cook fired before the meeting, but that effort failed, and she voted with the majority.
What changed in the FOMC’s statement:
The big change in the Statement was the shift in risks to the weakening labor market, and away from inflation, as “downside risks to employment have risen” and “’jobs gains have slowed,” while the “unemployment rate has edged up.”
New: “Recent indicators suggest that growth of economic activity moderated in the first half of the year.”
Old: “Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year.”
New: “Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.”
Old: “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.”
New: “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.”
Old: “The Committee is attentive to the risks to both sides of its dual mandate.”
So, the balance of risks shifts to the labor market, and away from inflation. That shift to the weakening labor market keeps cropping up in the rest of the statement.
New: “In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4 to 4‑1/4 percent.”
Old: “In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.”
New: “In considering 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.”
Old: “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 “dot plot” less dovish than some expected.
Today’s meeting was one of the four per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plot.” The prior SEP came out at the June meeting. The SEP is one of the ways with which the Fed communicates to the public what its thoughts are about the future of the economy, the labor market, inflation, and monetary policy – given the state of today’s economy. If something changes, the participants’ views change, and adios prior dot plot.
In the June dot plot, the Fed saw two 25-basis-point cuts by the end of 2025; it also saw rising inflation and unemployment rates.
Today, it saw one more 25-basis point cut than in June, while projections for inflation and the unemployment rate remained the same, and the projections for GDP growth got bumped up from June’s projections.
Dot plot sees 2 more cuts in 2025. Today’s median projection for the end of 2025 of the mid-point of the federal funds rate fell to 3.625%, indicating 50 basis in cuts, in addition to today’s 25 basis point cut.
Projections by the 19 FOMC members for the midpoints of the federal funds rate by the end of 2025 (bold = median):
- 1 sees 5 cuts (Stephen Miran is that you?)
- 9 see 2 more cuts
- 2 see 1 more cut
- 6 see no more cuts
- 1 sees 1 rate hike.
These median values of the SEP are neither decisions nor commitments. Members change their projections as the economic situation changes.
The “longer-run” federal funds rate in 2028 and beyond remained at 3.0%. In other words, in 2028 and beyond, the Fed sees the midpoint of the federal funds rate (3.0%) to be 1 percentage point higher than it sees the PCE inflation rate (2.0%), unchanged from the prior SEP.
Inflation projections remained high:
- Headline PCE inflation by the end of 2025 remained at 3.0% (same as in prior SEP). The most recent headline PCE price index (for July) was 2.6%.
- “Core PCE” inflation by the end of 2025 remained at 3.1% (same as in prior SEP). The most recent actual core PCE price index (for July) was 2.9%.
- Hitting the 2.0% inflation target would have to wait till 2028 (same as in prior SEP).
GDP growth projections got ratcheted up to 1.6%, from 1.4% in the prior SEP.
And the median projections for 2026 GDP growth rose to 1.8%, from 1.6% in the prior SEP (2% is the 15-year average real GDP growth of the US).
Unemployment rate projections unchanged: The median projection for the unemployment rate at the end of 2025 remained at 4.5%. In August, the unemployment rate was 4.3%. These are still historically relatively low unemployment rates.
The whole statement:
Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.
In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4 to 4‑1/4 percent. In considering 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; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Alberto G. Musalem; Jeffrey R. Schmid; and Christopher J. Waller. Voting against this action was Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting.
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Effectively every single reporter has called “Bullshit” this time, rather than their regular pattern of asking weird BS questions.
Wolf: This is a perfect time for you to share your big picture economic prescription for the American economy? Long term remedy, not a quarterly elixir. I dislike government intervention in the economy, despise crony capitalism, believe the twelve central planners at the FED should give up on trying to temper both sides of the business cycle, but I understand your prescription will include directions for federal government and the FED.I look forward to hearing what the medicine is even if it tastes bad. I want to see, smell, hear and taste the medicine even if Congress or President will never go along with implementing it.
That one reporter called out the Fed for always being two years away from 2% inflation…
What do you mean they called bullshit? Like they didn’t buy the Fed’s reasoning? I didn’t see the questions so I just don’t know what specially you’re referencing.
I’m a bit disappointed Powell blamed much of the inflation on tariffs and claimed disinflation in services.
Transitory 2.0? Hopefully not.
Quite simply the best analytics and dissemination of Fed Speak I’ve ever seen. Where were you when Greenspan unloaded his convoluted press briefings?
Powell said this was a “risk-management” cut, as Wolf talked about in an earlier article.
Nonetheless, cutting in the face of rising inflation seems like insanity. No one really knows the employment situation. The unemployment rate has supposedly barely changed despite supposedly much lower jobs numbers. Huh? Maybe this is possible if the whole labor market is being reduced, but still the jobs numbers seem too low for a marginal increase in the unemployment rate.
Interesting, all FOMC members voted for the cut except for Trump’s lapdog Miran. This was a nice “in your face” to Trump. I generally agree with Trump on most of his policies, but he is a complete jackass when it comes to the Fed and interest rates. I guess this is a major side effect of being a real estate guy.
Did you read the article?
Miran only dissented because he wanted a BIGGER rate cut. He was 100% following the party line and actively advocating for a 50bp drop.
He didn’t give the finger to any of his handlers.
He also wanted 5 more cuts this year, probably. Trump Whitehouse wants inflation so badly for unclear reasons.
KUDOS FED. Perfect timing. The rate-of-change in monetary flows, the proxy for R-gDp, is now falling. N-gDp level targeting at work.
Is a targeted 2% inflation rate price stability or price manipulation? Does. In an economy where even a very physically or mentally challenged individual can find a job, does a 62.4% workforce participation indicate full employment?
It’s tough to get to any destination when you don’t know where you and don’t know where you’re going, isn’t it?
Between 25 and 65 the participation rate is 83.7. The only time higher is in 22 unless you go back to the 90s, which was especially high compared to other time periods.
Dunno what the obsession with senior citizens and children working is.
What a uselesss bunch! Go big and make something move! At least .50 basis.. The banks were already lowering rates on anticipating this.. so no big deal on most financial items.. especially mortgages.. so.. when do they meet again to lower it(IF they do) with 3 months left of 2025?
Ten year Treasuries dropped from 4.05% to 3.99% almost instantly after the announcement of the cut. As Powell started talking and reality kicked in, the rates zoomed back up to 4.07%, with all notes and bonds yields above yesterday’s close. The bond market is more worried now about inflation than yesterday.
One of the reporters questions hit the nail on the head. The feds reckless asset buying and rate cuts drove housing up such that those that owned already got rewarded and those who did not are now priced out.
Powell went on to pat himself on the back stating that his rate cuts saved house builders, completely ignoring the fact that those new houses were for insane prices.
Very depressing to see him completely miss the point, or miss the point on purpose. It really felt like “f you we got ours”.
Miran….. I read his paper, of Mar a Lago accords fame (or infamy). To those who might also read it, you may come away thinking the same thing I did….this guy went to Harvard??? It reads kind of like AI, where the words and sentences make sense, mostly, but it just doesn’t tie together.
Historically low unemployment rate and a 4% that was the normal before 2008.
No need to cut. Powell has early dementia.
Solid job by the Feds. This is all but guaranteed to jump start the housing market with lower rates. Expect sellers to lower asking prices to attract even more. Inventory will be at record lows in 6 months as buyers market right around the corner.
XHB down. Seems market is thinking otherwise.
Can I have some of whatever you’ve been smoking?