The Federal Reserve cut rates by a quarter point as expected on Wednesday. The unity displayed at the previous meeting has fractured – the vote was 10-2. The dissents included new Fed Governor Miran, who advocated for a 50 bps cut, and Kansas City Fed President Schmid, who dissented in support of no cut at all. The Fed has now cut 150 bps over the last 13 months, bringing the Fed Funds rate down to 3.75-4.00%. It looks like Schmid is representing a group advocating to “at lease wait a cycle” before cutting again. Market expectations were extremely “dovish” going into the meeting, with a 90% probability of a December cut priced into the futures markets. Powell stated, “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.” The moment he said that, the 10-year Treasury spiked from 3.99% to 4.08%. Markets had already priced in a December cut (along with about 4 further cuts next year). December rate-cut futures went from 90% to about 69% as of now (Powell = Grinch. It’s interesting to note that this is only the fourth time in modern history that the Fed has cut rates while stock markets are at all-time highs. The Fed appears to be getting closer to the so-called “unknowable until we are there” neutral rate, estimated at 2.75-3.25%.  

The Fed is reacting to weakness in the labor market (the “dual mandate” is now weighted more towards labor market concern than inflation watch). Complicating matters is a Fed that is “flying blind” due to the government shutdown (the second longest in history, now entering its second month). November is beginning, and the September jobs data has not been released – along with no CPI, PCE or other inflation metrics. Meanwhile, private-sector jobs reduction announcements are piling up – Amazon (14,000), UPS (48,000), Target (1,800 – first major cuts in a decade), Paramount/CBS (1,000), etc. “You see a significant number of companies either announcing that they are not going to be doing much hiring or actually doing layoffs, and much of the time they’re talking about AI and what it can do,” Powell said. “We’re watching that very carefully.” 

More on AI: Powell indicated that the unprecedented spending boom is not dependent on rates. “I don’t think that the spending that happens to build data centers all over the country is especially interest-sensitive,” Powell said. “It’s based on longer-run assessments that this is an area where there’s going to be a lot of investment, and that’s going to drive higher productivity.” More productivity usually means fewer jobs, so it’s a concern to the Fed. What about inflation? “Inflation, away from tariffs, is actually not so far from our 2% goal,” remarked Powell. Is he taking a “sideways victory lap” as he realizes he has four meetings left as Fed Chair, and the 2% goal seems unlikely to be reached during his tenure? Possibly. Note that, due to the sell-off in Treasuries and other rate metrics, mortgage rates actually rose 20 bps on Thursday in the wake of a 25 bp Fed cut, which is an unintended consequence of a market that turns out to have been overly bullish. Today the 10-year is sitting at 4.10% after sitting at sub 4% for a while. Stay tuned…