As expected, the Fed cut its target for the federal funds rate by 25 basis points for the third time this year, from 4.5%–4.75% to 4.25%–4.5%. All Committee members but one, President Hammack of the Federal Reserve Bank of Cleveland, in her first FOMC meeting, voted to cut the rate. The Committee also released a new summary of economic projections, which contained significant revisions. Key among those was a reduction in the possible rate cuts in 2025 from four in the last SEPs to only two in the new projections. The SEPs also contained estimates of increases in GDP growth, unemployment and inflation. The projections also failed to show significant progress on inflation until the end of 2026. In accompanying statements, Chairman Powell suggested that the progress achieved thus far in bringing inflation down while maintaining a low unemployment rate signaled a potential new phase in policy, where the Committee could be cautious with further cuts to be managed with the goal of continuing to achieve progress on inflation while promoting full employment. He noted that policy tightness has been reduced by 100 basis points and that further moves would be determined based on what happens to inflation. And on this, the Committee could now be ready to pause further rate cuts, depending upon what happens to inflation and particularly the labor market, which so far has remained firm.
Both the Committee’s statement and Chairman Powell’s comments were not well received by financial markets. As the chart below shows, the Dow Jones index, for example, declined over 1100 points, its downward trend starting with the press conference and continuing through the rest of the day.
Questions from reporters focused on the nuances of current and future policy moves, to which Powell responded that he believed the economy was on track to achieve its dual mandate for inflation and employment. He gave specific, detailed responses to questions about the timing of future moves and what would cause a pause, as well as what would cause the Committee to increase or decrease rates. As has been the case in the past, he emphasized that the economy was strong and growing above potential. Indeed, Thursday’s release of the final estimate of GDP growth in Q3 of 2024 put it at 3.1%, which is above what economists had viewed as potential for the economy. We conclude that the Committee continues to view policy as restrictive. The labor market is slowly contracting but not at a rate to cause the Committee to change policy at this time, and inflation is still above the Committee’s 2% target for PCE, which now stands at 2.4% up from 2.3% in October. It is still too soon to say what the new administration’s tariff and other policies might imply for Fed policy. One additional side note came up when a reporter asked whether the Fed was going to begin to hold Bitcoin, as some politicians have recently suggested. Powell responded that the Fed lacked the authority to hold Bitcoin and was not contemplating such a move. That sidebar comment resulted in a significant drop in the price of Bitcoin that day.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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