Rate Cut and Dissenting Views
The Federal Open Market Committee (FOMC) delivered a quarter-point reduction in interest rates as widely anticipated. However, the decision was marked by notable dissent. Governor Stephen Miran voted against the consensus, advocating for a more aggressive half-point cut. Conversely, Kansas City Fed President Jeffrey Schmid opposed any reduction, representing a growing faction concerned about potential risks of easing amid persistent inflationary pressures.
Powell Signals Uncertainty Over December Rate Cut
Federal Reserve Chair Jerome Powell used unusually firm language to temper expectations surrounding a potential rate cut in December. Despite markets pricing in nearly a 90% chance of easing, Powell emphasized the diversity of opinions within the committee. “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it,” he stated during the press conference, underscoring the complex internal debate.
Quantitative Tightening to Conclude in November
The committee confirmed the end of quantitative tightening (QT) following November’s operations, resolving market uncertainty about the timeline. The Fed’s balance sheet, currently at $6.6 trillion, will cease asset roll-offs thereafter. Powell noted the reinvestment of maturing mortgage-backed securities into short-term Treasury bills, which will shift the portfolio towards shorter durations and a heavier Treasury weighting.
Inflation and Economic Outlook Amid Data Challenges
Powell indicated inflation is gradually moving closer to the Fed’s 2% target, currently estimated at approximately 2.8% using the preferred personal consumption expenditures price index. Tariffs continue to exert upward pressure, contributing around half a percentage point to inflation, though this effect is expected to be temporary. The ongoing federal government shutdown has delayed official inflation data releases, complicating the economic assessment. Despite data limitations, Powell maintained that the overall economic outlook remains consistent with previous projections: moderated growth, rising unemployment, and inflation that remains somewhat elevated.
“He kind of did a WWE slam on those expectations of a December rate cut. The door is not completely closed, but it was expected to be a foregone conclusion. And he came out pretty vociferously and said, ‘Nope, better not think about it that way.'” — Dan North, Senior Economist at Allianz
“We believe there is an increased chance that December’s meeting may skip a cut, pushing further accommodative moves into the new year and potentially to a new Chair.” — Rick Rieder, Head of Fixed Income at BlackRock
“A December rate cut still seems likely. No Fed leader wants to be responsible for a slowdown or recession.” — Heather Long, Chief Economist at Navy Federal Credit Union
FinOracleAI — Market View
The Federal Reserve’s October meeting confirmed a cautious yet proactive approach amid persistent inflation and economic uncertainty. The rate cut was modest, reflecting a balance between supporting growth and managing inflation risks. Powell’s firm stance on December’s rate decision signals potential volatility in market expectations and underscores the Fed’s internal divisions.
- Opportunities: Ending QT may stabilize financial markets and improve liquidity conditions.
- Risks: Inflation remains above target, and the government shutdown creates data gaps that could obscure economic signals.
- Uncertainty: Internal Fed disagreements could lead to unpredictable policy shifts in coming months.
- Market Impact: The Fed’s messaging may temper expectations for aggressive easing, influencing bond yields and equity valuations.
Impact: The Fed’s measured easing and cautious communication are likely to produce a neutral to slightly positive market reaction, as investors adjust to a less aggressive policy path and improved clarity on balance sheet management.
