FOMC Commentary – December 18, 2024

By Jeanette Garretty, Chief Economist

Confirming recent expectations in financial markets, the Federal Open Market Committee (FOMC) announced a further 25bps cut in the Fed Funds rate while changing projections for rate cuts in 2025. The Fed Funds target range is now 4.25%-4.5%. In the accompanying Summary of Economic Projections (SEP), the members of the FOMC indicated a slight but notable revision in their estimate of the “neutral” rate of interest (the rate which is neither contractionary nor expansionary) to 3.1% from the earlier (September) estimate of 2.9%. This shift in the neutral rate is one explanation for a reduction in the projected rate cuts in 2025. Also contributing to the revision in rate cuts next year is a modest but clear concern that inflation remains a threat. A useful way to think of today’s SEP is that it signals that the Fed thinks that the risks to economic growth and unemployment are moderate to low, whereas the risks of price inflation remain elevated.  In the current environment, the Fed would like to remain positioned to push against inflation if the threat of price increases escalates in 2025.  It is unclear how much to read into the economic growth projection of 2.1% in 2025, down from the upwardly revised 2.5% in 2024; economists and economic prognosticators are notorious for kicking the can down the road, shifting the projection for one year into the following year.

An interesting response by Chairman Powell to the first question in the press conference, asking why cut interest rates at all if inflation is above the target of 2%: “I would say that today’s cut was a closer call,” but “ultimately it was decided to make [this 25 bps] cut.” Financial markets are likely to remember and react to this comment for quite some time. As has often been the case with Chairman Powell, he has said something fairly negative in the eyes of financial markets — that today’s rate cut might actually not have happened— and then immediately modified the message. Of additional interest, Powell revealed much more about the assumptions behind the dot-plot projections to an unusual degree. Specifically, he discussed that some FOMC members were factoring in greater policy uncertainty, including (apparently) the possibility of tariffs, with their projections. Chairman Powell has always assiduously avoided projections of the economic impact of policy decisions not yet made; revealing these details about the FOMC decision-making at this meeting would seem to show that not every FOMC member is aligned with this stance.

As the press conference proceeded and Chairman Powell was pushed on the apparent impact of the November elections on the FOMC forecasts, he highlighted that the November election was not the only change in the environment since the last meeting. “Inflation has accelerated in October and November and the committee has raised its inflation number 0.5% since September.”  It is doubtful that financial markets are going to find this a reassuring comment.

Chairman Powell actually mentioned the Teal Books!! This is a first. The Teal Books contain the economic forecasting detail provided to the Fed and the FOMC by the Research & Statistics Department of the Federal Reserve. Remembering that this is a Fed Chairman who professes to not believe in economic forecasting and who seldom has referenced his own research staff economists, this is quite amazing. The reference, however, went nowhere in the press conference itself.

Per several questions about inflation, Powell’s elaboration of his own view of inflation emphasized an ongoing adjustment — an “unwinding” — of the extraordinary developments during the pandemic. Housing Services continues to loom large in his thinking as a sector with further adjustments to come.  He also continued to reject the view that labor markets are hindering progress toward 2% inflation.  Several times, Chairman Powell cited a labor market that has “cooled off” considerably.

Thank goodness for a question about Bitcoin, which provided a momentary break in this chaotic discussion about future Fed policy. “Do you see any value in the US government being able to hold Bitcoin?” The response was a clear-cut statement about not being allowed to hold Bitcoin and not looking for permission to do so.  No mention of Elon Musk, Howard Lutnick, or anyone else, though I’m sure some of the reporters would have loved to do that follow-up

What’s the biggest challenge to the economy in the next administration?  A beautiful politically-savvy avoidance of answering the question executed by Powell: “I feel very good about the economy right now. I think the economy is in a very good place. I look forward to another year.”

Policy is meaningfully restrictive, the economy is doing well, and “these cuts” (past and projected?) should support ongoing economic growth while maintaining the fight against inflation; this is Chairman Powell’s summary, but the last questions continue to hammer on the inflation outlook, geopolitical risks and wage growth outpacing inflation. The last question is one that I would have thought might have been the first:” Do you think you might have to give up on your goal of 2% inflation?” The answer, of course, was “No.” But the follow-up was a zinger, asking if Powell would definitively rule out an interest rate hike (!!) in 2025.  At this point, I think that Chairman Powell was happy to get off the podium.

This was a hot mess of a press conference, exposing once again the difficulties of being so “data-driven,” consigning Fed policy to tactical responses within a questionable or non-existent strategic framework.  More to come. Taken at face value, markets are going to have to adjust to an outlook for interest rate cuts that is much less benign, including a 10-year Treasury that remains elevated due to inflation and interest rate fears. Cramming a nuanced discussion of Fed Policy into a 45-minute press conference without appropriate advance communication to markets and with no obvious reason to avoid such communication to markets remains puzzling.  And, really, not a good idea.

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