jakiro
One sentence review:The 25bps interest rate cut itself was in line with expectations, but the dot plot and press conference information were more dovish than market expectations..This kind of pigeon is reflected in three aspects.First, the “hawkish dot plot” that the market was worried about (such as no interest rate cut in 2026) did not appear. The dot plot significantly raised the economic growth expectations for 2026-2027, lowered the inflation expectations, and maintained the expectation of one interest rate cut per year, presenting a Goldilocks scenario.Second, the press conference was more dovish than expected. Powell seemed to have returned to the August Jackson Hole meeting, repeatedly emphasizing the risk of deterioration in the job market and downplaying the risk of upward inflation.Third, technical balance sheet expansion (RMP) began on December 12. The initial purchase amount was 40 billion per month, and the volume and timing were slightly higher than expected.
1. Five comments on the FOMC
1. Reasons and differences for cutting interest rates by 25bps?
During the press conference,Powell made it clear that the softening of the job market and the “scheduled fall” in inflation were grounds for a further 25bps rate cut (rather than waiting until January next year) in the absence of data.
But the differences also increased.Compared with the two dissenting votes in September (Miran recommended a 50bps rate cut and Schmid recommended no rate cut), there were three dissenting votes at this meeting, with Miran supporting 50bps and Schmid and Goolsbee recommending no rate cut.special,There were also 4 “soft objections” votes at this meeting, that is, the people who predicted only two interest rate cuts in 2025 in the dot plot (which is equivalent to no interest rate cuts this month) but did not vote.These may include those who have previously made hawkish statements but are not members of the 2025 voting committee (such as Logan and Kashkari), or they may include voting committee members who voted in favor even though the dot plot did not support an interest rate cut (such as Collins and Musalem)
2. What is the path for future interest rate cuts?
On the one hand, the statement (as scheduled) sends a signal of “wait and see, no interest rate cut for the time being” early next year..The conditions for adjusting the path of future interest rates in the statement were changed from “In assessing the appropriate stance of monetary policy” to “In considering the extent and timing of additional adjustments to the target range for the federal funds rate.” This change of expression also appeared at the FOMC meeting in December last year, which usually means that we have to wait and see in the short term.However, considering that the market originally expected only two interest rate cuts in 2026, it is not surprising that the Federal Reserve issued a signal to suspend interest rate cuts early next year.
On the other hand, the dot plot still maintains expectations for one interest rate cut in 2026 and 2027..Previously, the market was worried that due to a more optimistic GDP outlook and the recent general recovery in upstream commodity prices, coupled with the divergence of opinions within the FOMC, the Federal Reserve may adjust its interest rate cut expectations in 2026 to 0 times.
3. What are the signals in the bitmap?
Maintaining the path of interest rate cuts unchanged, revising the GDP forecast upwards and revising the inflation forecast downwards can be said to outline a very “Goldilocks” prospect (better growth, lower inflation, gentle interest rate cuts).The overall signal is neutral, but slightly dovish compared to the market’s previous hawkish expectations.Specific content:
1) There was still one interest rate cut in 2026-27, which is no different from September SEP..
2) Increase the GDP forecast for 2026 by 0.5pp to 2.3%.At the press conference, Powell said it stems from more optimistic expectations for productivity, consumption and investment activities.
3) Lower the PCE and Core PCE inflation forecasts in 2026 by 0.2pp and 0.1pp respectively to 2.4% and 2.5%, but keep the unemployment rate forecast unchanged.
4. A dovish signal from the press conference?
1) Make it clear that “the next step is not to raise interest rates”(In answer to Nick’s question).
2) Regarding employment, Powell made it clearEmployment data is already weak and overestimated(Specifically referring to the QCEW annual revision).Throughout the press conference, Powell repeatedly stated that “employment growth is actually negative,” emphasizing the risk of non-linear deterioration.
3) In terms of inflation, Powell once again stated that it is not a problem under the baseline scenario, that tariffs are one-time, and that the weak job market means that service industry inflation will be difficult to turn back.(“Evidence increasingly suggests that services inflation is falling” and “goods inflation is concentrated entirely in industries subject to tariffs”).
Overall,Powell seemed to have returned to the Jackson Hole meeting at the end of August and returned to the “employment risk theory”, which is good news for investors who have been nervous recently.
5. How to understand reserve management expansion (RMP)?
Although it is also a bond purchase, unlike quantitative easing (QE), the purpose of RMP is to ensure that the scale of reserves matches the natural growth of the size (demand) of the banking system, so the pace of purchases is relatively slow.This time the FOMC announced that it will start purchases at a rate of 40 billion US dollars starting on December 12. It may maintain a relatively high purchase rate in the short term, but the decline will gradually slow down (looking at Powell’s statement, it is expected that the center may be around 20-25 billion per month).
There are two background reasons for this
1) Liquidity pressure in the repo market has continued since October (SRF usage has always been higher than 0 and the SOFR-ONRRP interest rate spread has always been above 15bps). Therefore, the Federal Reserve believes that the current reserve level has met the “sufficient but not excess” (ample) balance sheet reduction endpoint and can start the next stage of natural balance sheet expansion.
2) The FOMC believes that the sharp increase in TGA during the tax payment season next April will draw a large amount of reserves, so it is prepared for a rainy day.ofRelease liquidity in advance.
From a technical perspective, in addition to the purchase speed and launch time slightly exceeding expectations, this RMP also allows the purchase of short-term coupons with a term of 1-3 years.This is better than good for the short end.
2. Press conference shorthand
1. Howard Schneider (Reuters):
First of all, regarding the statement, to make it clear that we understand the same.Insert the phrase “consider the magnitude and timing of additional adjustments”,Does it mean that the Fed is now on hold?Until there are clearer signals about inflation, employment or the evolution of the economy?
Powell:
Yes, the adjustments since September put our policy within a wide range of estimates of the neutral rate.As we noted in today’s statement, we are well-positioned to determine the magnitude and timing of additional adjustments based on incoming data, the evolving outlook and the balance of risks.This new wording indicates that we will carefully evaluate incoming data.Additionally, I would note that we have lowered the policy rate by 75 basis points since September and 175 basis points since September last year,The federal funds rate is now within a wide range of estimates of its neutral value, and we are well-positioned to wait and see how the economy evolves.
Howard Schneider (Reuters – Follow-up):
If I could follow up on the outlook, it seems like with GDP growth increasing, combined with easing inflation and a fairly stable unemployment rate, it seems like a pretty positive outlook for next year.What causes this?Is this an early bet on AI?Is there some sense of increased productivity?What’s driving all of this?
Powell:
There are many factors driving forecasts.If you look broadly at outside forecasts, you also see growth picking up in many forecasts.This is partly because consumer spending has held up and is very resilient; on the other hand, AI-related data center spending has been supporting business investment.Overall, the baseline expectation from the Fed and outside forecasters is that growth will pick up next year from the current relatively low level of 1.7%.I mentioned that the SEP median growth is 1.7% this year and 2.3% next year.In fact, part of it is the government shutdown.You can take 0.2 percentage points from 2026 and put it into 2025.So it should actually be 1.9% and 2.1%.But overall, yes,Fiscal policy will be supportive and, as I mentioned, AI spending will continue.Consumers continue to spend.So it looks like the benchmark for next year is solid growth.
2. Steve (CNBC):
Thank you, Mr. Chairman.You previously described the rate cut in terms of a risk management framework.To follow up on Howard’s question, is the risk management phase of interest rate cuts over?Given the jobs data we’re likely to get next week, have you taken enough “insurance” measures against potential weakness?
Powell:
We will have a lot of data between now and the January meeting that we will factor into our considerations.If you look back, we kept the policy rate at 5.4% for over a year because inflation was very high and the labor market was very solid.Last summer (summer 2024), inflation fell and the labor market started to show real signs of weakness.So we decided, as our framework tells us, that when the risks to both objectives become more equal, you should move away from tending to deal with one of them, which was inflation at the time, to a more balanced, more neutral position.So we did it.We had some rate cuts, then paused for a while to see what happened mid-year, and then resumed the rate cuts in September.We have now had a total of 175 basis points of rate cuts.As I mentioned, we feel that our positioning now puts us in a good position to wait and see how the economy evolves from here.
Steve (CNBC – Question):
If I could follow up on the SEP, you’re forecasting a big increase in the growth numbers, but not a big drop in the unemployment rate.Is there an AI factor in this?What’s the impetus to get more growth without a big drop in unemployment?
Powell:
This means greater productivity.Part of that may be AI.I also think productivity has gotten structurally higher over the past few years.If you start thinking of it as 2% a year, you can sustain higher growth without creating more jobs.Of course, higher productivity is also what leads to higher incomes over the longer term.So that’s basically a good thing, but that’s really what it means.
3. Colby Smith (New York Times):
Today’s decision was decidedly divided.Not only were there two formal dissenters against the rate cut, there were also four “soft” dissenters.I wonder if the reluctance of several members to support a near-term rate cut indicates that the bar for a near-term rate cut is much higher?If conditions are good now, what exactly does the committee need to see to support a rate cut in January?
Powell:
As I mentioned before, the situation is that our two goals are somewhat in tension.interestingly,Everyone at the FOMC table agrees that inflation is too high and we want it to come down; they also agree that the labor market is already soft and there are further risks.Everyone agrees on this.The disagreement is over how to weigh those risks, what your forecast looks like, and where you think the bigger risks ultimately lie.It’s very rare to have this kind of sustained goal tension, and when you do, you’ll see what’s happening now.This is actually what you expect to see.At the same time, our discussions were thoughtful and respectful.People have strong opinions and we come together to get to a place where decisions can be made.We made a decision today.9 out of 12 people support it, so the support is quite broad.But it’s not like normal where everyone agrees on the direction and approach.Opinions are more divided this time around, which I think is just inherent to the situation.
As for what it will take, we all have a vision for the future.But I think ultimately, now that we’ve had 75 basis points of rate cuts and the effects of those rate cuts are just starting to show, we’re in a good position to wait.We’re going to get a lot of data.Incidentally, data, especially household survey data, need to be assessed with caution.For very technical reasons (the way the data is collected), this data can be skewed, not just fluctuated, but distorted.This is because data was not collected during half of October and November.So we have to look carefully and look with suspicion.Nonetheless, we will have a lot of December data by the time of the January meeting.
Colby Smith (New York Times – Question):
Regarding dissent, given the complex economic situation we’re in, is there a point at which these dissents become counterproductive, both in terms of communications from the Fed and messaging about future policy paths?
Powell:
I don’t think we’re at that point.I will say again, these are good, thoughtful, respectful discussions.You’ll hear a lot of people, including outside analysts, say the same thing: “I can defend either side.” It’s a close call.We have to make a decision.In this current situation, if you look at the SEP, you will find that many people agree that the risk of unemployment is tilted to the upside, and the risk of inflation is also tilted to the upside.So what do you do?You only have one tool and can’t do two things at the same time.So, moving at what speed?How large-scale a move will be?This is a very challenging situation.I think we’re in a good position to wait and see how the economy evolves.
4. Nick Timiraos (Wall Street Journal):
There has been some discussion recently about the 1990s.In the 1990s, the Committee conducted two separate sequences of rate cuts, each by 75 basis points (1995-96 and 1998).After both of those times, the next move for interest rates was to go up, not down.With policy now closer to neutral, must the next move in interest rates be lower?Or should we think that policy risks truly go both ways from now on?
Powell:
I don’t think raising rates is anyone’s base case right now.I didn’t hear that.What you see is that some people feel like we should stop here, we’re in the right position and just wait.Some people feel we should cut interest rates once or more this year and next.But when people write their policy estimates, it’s either going to stay there, or a small amount of rate cuts, or a little bit more of a rate cut.I don’t think the base case includes a rate hike.You are right, the two times in the 1990s did turn around after cutting interest rates three times.
Nick Timiraos (Wall Street Journal-Question):
If I may press, the unemployment rate has been rising very slowly for most of the past two years, and today’s statement no longer describes the unemployment rate as “remaining low.”What gives you confidence that it won’t continue to rise in 2026, especially given that housing and other rate-sensitive sectors still appear to be feeling constrained by policy?
Powell:
I think the thinking now is that now that 75 basis points more has been cut and policy is within reasonable estimates of the neutral rate, that will allow the labor market to stabilize or just move up another percentage point or two, but we’re not going to see any sharp decline, and we’re seeing absolutely no evidence of that at the moment.At the same time, policies are still not loose.We feel we have made progress this year on non-tariff related inflation.It will show up next year as the effects of tariffs play out.But like I said, we’re in a good position to wait and see how it plays out.
5. Claire Jones (Financial Times):
Many people interpreted your comments at the October meeting – “When things get blurry, we slow down” – to mean that there will not be a rate cut now, but rather a rate cut in January.So curious to know why the committee decided to act today instead of waiting until January?
Powell:
In October I said there was no certainty of action, and that was certainly true.Why are we acting today?I’ll point out a few points.First, the gradual cooling of the labor market continues.The unemployment rate rose 0.3 percentage points from June to September.Since April, employment has increased by an average of 40,000 per month.We think these numbers are overestimated by about 60,000, so it may actually be a decrease of 20,000 per month.And surveys of both households and businesses show declining supply and demand for workers.So the labor market continues to gradually cool down, maybe a little faster than we thought.
Regarding inflation, the data is slightly lower.Evidence is increasingly showing that services inflation is falling, but this is offset by rising commodity prices, with goods inflation concentrated entirely in industries subject to tariffs.More than half of the current source of excess inflation is in goods, namely tariffs.We must ask, what should we expect from tariffs?In part, that depends on whether we see broader economic overheating.We’re seeing wage growth reports that don’t show the kind of overheating economy that would produce “Phillips Curve” style inflation.Taking all these factors into consideration, we made this judgment.
Claire Jones (Financial Times – Question):
On the question of reserves, how worried is everyone about some of the tensions we’re seeing in currency markets?
Powell:
I wouldn’t say “worried.”The reality is that balance sheet reduction (QT) has been ongoing.The Overnight Reverse Repurchase Facility (ON RRP) dropped to almost zero.Then starting in September, the federal funds rate began to rise within the range, almost to the interest rate on reserve balances (IORB).There’s nothing wrong with that.What this tells us is that we are actually in a well-reserved regime.We knew this was coming.When it finally came, it was a little sooner than expected, but we were absolutely ready to take the action we said we would.These are the actions announced today:Restore reserve management purchases.This is completely separate from monetary policy, except that we need to maintain an adequate supply of reserves.
Why is the scale so large (40 billion)?Because April 15th (tax day) is coming soon.People pay large sums of money to the government, and reserves fall sharply and temporarily.This seasonal accumulation would have occurred anyway.In addition,Long-term sustained growth of the balance sheet requires us to add approximately 20-25 billion per month.So this is just preparing for the tax period in mid-April.
6.Andrew:
This is the last FOMC press conference before important Supreme Court hearings next month.Can you talk about how you would like the Supreme Court to rule?I’m curious why the Fed has been so silent on this critical issue.
Powell:
Andrew, this is not what I want to discuss here.We are not legal commentators.This is before the courts and we don’t think it would be helpful to engage in it as a public discussion.
Andrew (question):
Then let me ask another question (Mulligan).I want to go back to the 1990s question, do you think that’s a useful model for thinking about the current economic situation?
Powell:
I don’t think it rose to that level.It’s such a unique situation, it’s not the 1970s, but there is a real tension between our two goals.This was unique during my tenure at the Fed.Our framework says that when situations like this arise, we take a balanced approach.This is a very subjective analysis.This basically tells you that when two targets are equally threatened, you should maintain some sort of neutrality.We have been moving towards neutrality.Now we’re in the neutral range, I would say at the high end of the neutral range.It just so happened that we cut interest rates three times.We haven’t made any decisions about January yet.
7. Edward Lawrence (Fox Business News):
I want to ask about the decline in inflation expectations in the SEP report.Do you think the tariff increase will be passed on in the next three months?Is this a 6 month process?Because of this, are jobs a threat to the economy?
Powell:
Regarding tariff inflation, tariffs are announced, then they go into effect, and then it takes several months.Goods may need to be transported, and it may take considerable time for individual tariffs to fully take effect.But once it has an impact, the question is, isn’t this just a one-time price increase?If we assume no new significant tariffs are announced, goods inflation should peak around the first quarter of next year.It shouldn’t be much after that.If no new tariffs follow, we should start to see inflation fall in the second half of next year.
Edward Lawrence (Question):
I want to ask the elephant in the room (the obvious question).The president spoke openly about his pick for the new Fed chair.Has this hindered your current work or changed your thinking?
Powell:
No.
8. Michael McKee (Bloomberg):
The 10-year rate is 50 basis points higher than when you started cutting rates in September 2024, and the yield curve is basically steepening.Why do you think continuing to cut rates in the absence of data will reduce the yields that provide the biggest boost to the economy?
Powell:
What we focus on is the real economy.When long-term bonds move, you have to look at why.If you look at inflation compensation (breakeven inflation rates), they are at very comfortable levels, consistent with 2% inflation.So interest rates are not rising because of concerns about long-term inflation.That must be something else, such as expectations of higher growth.We also saw significant volatility at the end of last year, which had nothing to do with us and was caused by other developments.
Michael McKee (Question):
You mentioned that the public expects you to return to 2%, but the vast majority of Americans list high prices and inflation as their primary concerns.Can you explain to them why you prioritize the labor market (which seems relatively stable to most people) over their primary concern – inflation?
Powell:
We heard clearly through our extensive network of contacts that people were experiencing high costs.This is actually High Costs, many of which are not the current inflation rate, but embedded high costs caused by high inflation in 2022 and 2023.The best we can do is get inflation back to the 2% target while having a strong economy that allows real wages to rise.We need a few years for nominal wages to rise above inflation so that people can start to feel good about affordability.We are working hard to control inflation while also supporting the labor market and strong wages.
9. Victoria (Politico):
This is the third rate cut this year and the inflation rate is about 3%.The message you want to send is, as long as people understand that you still want to get back to 2%, are you comfortable with the current level of inflation?
Powell:
Everyone should understand that we are also committed to achieving 2% inflation.But this is a complex, unusual, difficult situation, the labor market is also under pressure, and job creation may actually be negative.Labor supply has also dropped significantly.This is a labor market that appears to have significant downside risks.People care a lot about this.The current inflation story is,If tariffs are excluded, the inflation rate is just over 2%.So it’s really the tariffs that are causing most of the inflation overshoot.We thought this was a one-off.Our job is to make sure it’s a one-off.If inflation is simply high and the labor market is very strong, interest rates will be higher.But now we face risks on both sides.
10. Elizabeth Schulze (ABC News):
To follow up, you have always said that employment growth is negative.Why do you think job growth is much worse than official data suggests?
Powell:
Estimating job growth in real time is difficult.They can’t count everyone.oneThere has always been systematic overestimation.They are revised twice a year.At the last correction, we thought it would be an 800,000 or 900,000 correction, and that’s exactly what happened.We believe this overvaluation continues and will be corrected.We think it’s overvalued by about 60,000 per month.So job growth of 40,000 might be negative 20,000.But this is also partly the result of a significant decline in labor supply.In a world where there’s no worker growth, you really don’t need a lot of jobs to achieve full employment.But I think in a world where job creation is negative, we need to look very carefully to make sure that policies are not suppressing job creation.
Elizabeth Schulze (Question):
Regarding supply, we are seeing large employers like Amazon citing AI as the reason for layoffs.To what extent do you now factor AI into the job market slack?
Powell:
That may be part of the story, but it’s not most of it.If there were really a lot of layoffs, you would expect continuing claims and new claims to rise.But it doesn’t.This is a bit strange.In the long term, AI may increase productivity and create new jobs.But it’s still early days and we haven’t seen much reflected in the layoff data yet.
11. Enda Curran (Bloomberg):
Given the wide range of views on the policy committee, why are there such wide divergences in views between the Reserve Bank governor and board members?
Powell:
It’s not that stark.Opinions within each group are also diverse.I don’t think it’s two camps.
Enda Curran (Question):
If the Supreme Court overturned the tariffs currently pending, what would be the economic impact on growth and inflation?
Powell:
I really don’t know.It depends on a lot of things we don’t know.
12. Christine Romans (NBC News):
I want to ask about the K-shaped economy.Upper-income households, bolstered by home equity and stock market wealth, are driving spending; but lower-income consumers are struggling with five years of rising prices.Is this so-called K-shaped economy sustainable?
Powell:
We hear this a lot.The financial reports of consumer companies facing low-income people all say that people are tightening their belts.The value of assets (real estate, securities) is very high, and they are often owned by high-income people.Whether that’s sustainable I don’t know.It is true that most consumption is done by people with more means.From a social perspective, it’s great to have a strong labor market over the long term, which helps people at lower income levels.This is something we all want to get back to.
Christine Romans (Question):
The housing market remains weak.With these rate cuts, is there any chance we’ll see an increase in affordability in the housing market?The median age of first-time buyers is now 40, a record high.
Powell:
The housing market faces significant challenges.I don’t think a 25 basis point cut in the federal funds rate would have much of an impact on people.Housing supply is low.Many people have mortgages with extremely low interest rates during the pandemic, making moving expensive.Additionally, our country has long built insufficient housing.This is a structural housing shortage.We can raise and lower interest rates, but we really don’t have the tools to address the long-term structural housing shortage.
13. Chris Rugaber (Associated Press):
Wage growth slowed.Where are the risks of inflation?If inflation is cooling and hiring is likely to be negative, why aren’t we hearing more talk of rate cuts?
Powell:
The obvious inflation risk is tariff inflation.Most of us expected this to be a one-off.But the risk is that it could last longer than expected.Another possibility, which is less likely, is that economic overheating leads to traditional inflation.I don’t think this is particularly possible.The committee had a different assessment.
14. Neil Irwin (Axios):
Do you think we are experiencing a positive productivity shock (whether from AI or policy)?To what extent does this drive higher GDP forecasts in the SEP?
Powell:
Yeah, I never expected to see five or six years of 2% productivity growth.This is definitely higher.If you look at what AI can do, you can see the promise of productivity.This might make the people using it more efficient, or it might force others to find other jobs.So yes, we’re definitely seeing higher productivity.
15. Matt Egan (CNN):
After today, you only have three more meetings left at the helm of the Fed.Have you ever thought about what you want your legacy to be?
Powell:
My thinking is that I really want to hand this job over to my successor when the economy is in a very good shape.I want inflation under control, back to 2%, and I want the labor market to be strong.This is what I want to do.
Matt Egan (question):
Do you plan to remain on the Federal Reserve Board of Governors after your term as Chairman expires?
Powell:
I am focused on the remainder of my time as president.I have nothing new to tell you about that.
16. Mark Hamrick (Bankrate):
Although many price levels remain high, interest rate cuts mean that savings rates (yields) have peaked, while borrowing rates remain high.Many Americans face liquidity or emergency savings challenges.Is this just collateral damage, or an unintended consequence of your tools being limited in addressing household mobility constraints?
Powell:
I don’t agree that this is collateral damage of our policy.What we do over time is create price stability and maximum employment, which is very valuable to everyone.When we raise interest rates to lower inflation, it does work by slowing the economy, but we have lowered policy rates back to a level where they are no longer highly restrictive.I think it’s about getting people off the hook for high inflation.We’ve actually weathered this wave of global inflation better than any other country.This is due to the extraordinary nature of the American economy.Thank you all.
