Amid 3 dissenters in both directions, FOMC cuts by 25 basis points. “Dot Plot” sees 1 cut next year, 3 members see 1 hike. Reserve management purchases of T-bills begins.
By Wolf Richter for WOLF STREET.
The FOMC voted today to cut the Fed’s five policy rates by 25 basis points, as widely expected, the third cut in 2025, after cutting by 100 basis points in 2024.
There were 3 dissenters of the 12 voting FOMC members, the most dissenters since September 2019, under Powell. Two dissenters (Goolsbee and Schmid) wanted no cut. Miran wanted a 50-basis-point cut. Dissents are a breath of fresh air.
The FOMC cut its five policy rates today:
- Target range for the federal funds rate to 3.5%-3.75%.
- Interest it pays the banks on reserve balances (IORB): 3.65%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 3.50%
- Interest it charges on overnight Repos at its Standing Repo Facility (SRF): 3.75%.
- Interest it charges banks to borrow at the “Discount Window” at 3.75%.
Major changes in the statement:
The FOMC decided to let the balance sheet grow “as needed to maintain an ample supply of reserves on an ongoing basis.” To do so, it will purchase “shorter-term Treasury securities,” mostly T-bills. Before QE, before 2009, the Fed’s balance sheet has always grown with the banking system and with the economy, and today’s policy shift reverts the Fed to the pre-2009 balance sheet management. We have discussed these reserve management purchases in detail here.
MBS continue to run off and that runoff will be replaced by T-bills, as per the Implementation Notes, which was first announced at the last meeting and has started on December 1.
This is the newly added language in the statement about it (the old language about ending QT was removed):
New in the statement about this: “The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.”
New in the Implementation Notes about this: “Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.”
Major other changes in the FOMC’s statement:
New: “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.”
Old: “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.”
Wide “Dot plot” disagreements from 1 rate hike to 6 rate cuts.
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 was released at the September 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 today’s state of economy. If something changes, the participants’ views change, and the dot plot changes.
Three members see 1 hike in 2026, up from 1 member seeing a rate hike in the September SEP, while at the other end, 1 member sees 6 cuts. And nearly everything in between.
The median projection for the mid-point of the federal funds rate at the end of 2026 was at 3.375%, indicating one rate cut in 2026, unchanged from the prior SEP in September.
Projections by the 19 FOMC members for the midpoint of the federal funds rate by the end of 2026 (bold = median):
- 1 sees 6 cuts
- 1 sees 4 cuts
- 2 sees 3 cuts
- 4 see 2 cuts
- 4 see 1 cut
- 4 see no change
- 3 see 1 rate hike.
These median values of the SEP are neither decisions nor commitments. Members change their projections as the economic situation changes.
Inflation projections:
- Headline PCE inflation by the end of 2026 edged down to 2.4%, from 2.6% in the September SEP.
- “Core PCE” inflation by the end of 2026 edged down to 2.5% from 2.6% in the September SEP.
- Not hitting the 2.0% inflation target till 2028 (same as in prior SEP).
“Longer-run” federal funds rate 100 basis points above inflation. The projections for the federal funds rate beyond 2028 remained at 3.0%, while PCE inflation rate projections remained at 2.0%. This means that members projected the federal funds rate to be 100 basis points higher than the rate of PCE inflation over the longer run.
GDP growth projections for 2026 ratcheted up to 2.3%, from 1.8% in the September SEP (the 15-year average real GDP growth is about 2%).
Unemployment rate projections unchanged: The median projection for the unemployment rate at the end of 2026 remained at 4.4%, same as in the September SEP. These are still historically low unemployment rates.
The whole statement:
Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year 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 rose in recent months.
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 3-1/2 to 3‑3/4 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 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.
The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.
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; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting; and Austan D. Goolsbee and Jeffrey R. Schmid, who preferred no change to the target range for the federal funds rate at this meeting.
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I smell a rat.
you mean the 6 cut rate rat?
They are desperate to avoid a spectacular implosion of their enormous asset bubbles.
Looks like they are vying for a spectacular implosion of the currency.
The cult of Number Go Up shall not be infringed.
We are well on our way to following in the footsteps of our forefathers Weimar, Venezuela, and Zimbabwe. Let’s make them proud!
It seems the Fed does not know what is happening in the economy. Not having data is part of that but also not knowing future impacts of tariffs, AI, etc. My own hope is the Fed maintains its independence and does not become too political.
The result of this very stupid direction by the Federal Reserve today in cutting short term interest rates will be higher mortgage rates along with rising yields in 10 year and 30 year US Treasuries.
Let’s hope that’s the case and it will hold….at least then this rate cut might have some redeeming quality to it, although small, but higher mortgage rates is a win in my book.
“1 sees 6 cuts.” WTF
Please make it make sense why bond yields are falling across the board. Both short and long. 2:57 PM Eastern.
It will be temporary.
Howdy Folks. Perfect heading Lone Wolf. I have always considered the FED a clown show too.
Pending on the outcome of Trump vs Slaughter case. If this admin got the favorable ruling from Supreme court (which seems very likley), even though this case is about the FTCs, it might lend a precedent in which they will have full power to fire agency appointee, one has to wonder if the entire Fed Reserve will fall into this category as well. We already know Pow Pow is on the crosshair but imagine the entire board is no longer data dependent as they say and will change interest rates and monetary policy based on one person’s wish (if not, they will simply be fire and replace with loyalist)….let the real clown show begin then.
That case specifically EXCLUDES the Federal Reserve.
Not quite settled, this is still being brought up in the arguement and while the case is neither about the FED but let’s be real that’s on everyone’s mind, including the justices.
One thing for sure, as this case will likely be a win for this admin, and these people will take an itch and run a mile with it and expand what the court ruling allow for to beyond what they can get away with (or not get away with in many cases), so the FED IMHO will be at risk. You can also search for this article and it will give you some food for thought.
“Supreme Court Struggles With How to Insulate the Federal Reserve From Politics”
What a joke….oh well, market got another rally since the kid throwing the tantrum got what they want as always….good times.
I wish I could even be surprised by this.
/agreed … what happened to his October meeting driving on a foggy road analogy ~ “slowing down”?
The fed is not only a circus it is an echo chamber of useless idiots.
They did invent math formulas to try to define economics as a science but the dot plot suggests it is a combination of politics and complete guessing. Kind of like looking at weather where most models predict where a storm will go, often in early stages with an outlier. That is not this. I don’t have issue per se with the cut but the belief people have it is not what it objectively appears on the surface and of course will keep moving in that direction.
The only way to save a Pine Tree Republic is to shake it until all the superflous ornaments fall to the ground and smash into thousands of pieces. Instead, the Fed thinks we need lower financing rates to buy a bigger color wheel so everyone can ooh and awe about how pretty it all looks for the annual shore leave holiday spending season which is already running 24/365. Thank gawd there’s other uses for branches in the future. We’re gonna need a bigger rope factory soon. And the shape of that dot plot…is it begining to resemble the outline of a Chinese temple or perhaps Nomad itself? At any rate, there appears to be a lightning rod formation at the top…expecting a howling storm of electric bolts that could short out the entire card house? More bad ink to start the day is all we need. Red sky at morning, sailor take warning.
This Miran guy is a moron haha. How do you, when giving a professional opinion, forecast 6 cuts next year based on the data available, all of which is screaming the opposite? Crazy what’s going on in this administration.
Hey guys, I feel like this is not what Juvenal meant when he was talking about bread and circuses. The government is supposed to amass power by distracting people *with* circuses; it’s not supposed to actually become the circus itself. There’s a crucial distinction there that I think the reigning political party is missing.
Independence was fun while it lasted.