Fed Cuts 25 bps, Powell Talks Jobs (Including His Own), Control of House of Representatives Hangs in Balance
Yesterday’s Fed announcement of a 25 bp rate cut was expected along with Powell’s remarkable emphasis of the Federal Reserve’s apolitical stance. Fed Funds and 30 Day SOFR are at 4.60%. Speaking of politics, the party with a House majority has yet to be determined. Single-party control of Presidency, Senate, and House, means a sweeping economic agenda can be enacted in the spring. Bond markets have been volatile as markets speculate on potential tax cuts, tariffs, changes in spending priorities, etc.
Going into the weekend, the 10-year Treasury jumped from 4.30% last Friday to 4.48% on election night before rallying this week back down to 4.31%. No doubt that announcements and new policies will be closely watched and could be market movers over the next few months.
Powell was asked about the effect of potential new economic policies on interest rates and Fed policy. He responded that his role is not to speculate on unwritten legislation but rather to fulfill the Fed’s mission of financial stability. He was asked if he could potentially be demoted or fired by a sitting President. His icy, one-word response: “No.” (Later, he repeated that it is “…against…the…law” to do so). He highlighted the central bank’s commitment to setting policy based on economic data and principles rather than political pressures.
In worldwide capital markets, that approach is crucial for ensuring the Fed’s credibility in managing monetary policy, especially with the U.S.’s economic survival depending on a world that buys treasuries to fund deficits and uses the dollar as a reserve currency.
What’s next? The Fed is “on a path towards a more neutral stance” and of course is “data dependent.” Futures markets indicate a 66% chance of a 25 bp cut in December; remember, it was over 90% just weeks ago. Powell: “Nothing we see suggests we need to be in a hurry.” He is setting up expectations for a potential pause (January?). Futures markets are pricing in a possible pause in December or January, which would put Fed Funds and SOFR at 4.10%.
Jobs continue to be the focus for the Fed. Powell mentioned that the “Labor market has cooled a great deal” (Is he worried?) and that “we don’t need further cooling to achieve the inflation mandate,” signaling a willingness to cut rates to avoid that. Jobs data will be the “data focus” as Powell stressed the 3 month/6 month CPI averages indicate cooling inflation. Regarding pace, he mentioned that not every inflation report needs to be “cool” as “bumps are expected” due to monthly anomalies.
Where are we headed? The neutral rate of course. Powell alluded to the neutral rate’s opaqueness with some Fed Jedi speak: “We only know it by its works,” and referred to the process as “finding it carefully and patiently.” Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.