As expected, the Fed lowered its rates to the 3.50% to 3.75% range, a third consecutive quarter-point cut.

Several members voiced their disagreement, however. Austan Goolsbee, the president of the Chicago Fed, and Jeffrey Schmid, of the Kansas City Fed, voted for a status quo. Stephen Miran, chosen by Donald Trump, again opted for a 50bp cut.

Hidden divisions

This is the first time since 2019 that there were three dissenting votes. Jerome Powell thus managed to play down the rifts, at least on the surface, because the dot plots show that six FOMC members would have preferred higher rates at the end of this year, indicating a preference for holding steady.

All this confirms what we already knew: the Fed is divided at a time when there are risks on both sides of the mandate. "A significant number of participants agree that risks are up on unemployment and up on inflation. So what do you do? You have one tool that cannot do two things at once," Jerome Powell summed up.

Nevertheless, during his press conference, he placed more emphasis on labor-market risks. In his opinion, job gains, which have averaged 40,000 per month since April, are in fact negative. In recent years they have indeed been revised lower after the fact. Jerome Powell therefore estimates an overstatement on the order of 60,000 per month, implying average negative job creation of 20,000 per month since April.

At the same time, he still considers tariff-related inflation not to be durable: "If you strip out tariffs, inflation is around 2%... so tariffs are responsible for most of the overshoot in inflation."

A high bar for January

The bar nevertheless seems fairly high for a rate cut at the next meeting: "Interest rates are now within the range of estimates of neutral and we are well positioned to wait and see how the economy evolves."

While a lot of data is due before the next meeting, it may not help settle the question. The 43-day shutdown caused major disruptions, both for statistical agencies and for the US economy.

Markets reacted fairly well to the Fed's announcements, with stocks up and short-term rates down. Investors are thus taking away Jerome Powell's less hawkish-than-expected tone.

They are still betting on two additional cuts next year, whereas the median projection of Fed members shows only one. By then, a new Fed chair will be appointed by Donald Trump; a willingness to cut rates is an essential criterion in his choice.

Uncertainty over his future

One of the big unknowns remains Jerome Powell's future. While his term as chair ends in May, he remains a governor until January 2028. At this stage, he still refuses to say whether he will stay beyond May.

Asked about the legacy he would like to leave at the end of his term, he replied: "I think what I really want is to hand this job to the person who replaces me with an economy that is doing very well."

At this point, he seems rather well placed to meet that objective. The new economic projections are better than they were three months ago. Compared with September, the Fed has raised its growth forecasts and lowered its inflation forecasts.

 

Fed economic projections. Source: Financial Times