US: Fed cuts again, but treads more cautiously

The US Federal reserve cut rates by 25 bps on Wednesday, taking the Fed Funds target range to 4.25% - 4.5%.

They are now signalling fewer cuts for 2025 and a slowing of the pace. Their intention is to now tread more cautiously.

The accompanying statement was barely changed from last month with one notable exception, but participant forecasts were a lot different to the last ones in September:

• In terms of the statement, they added “extent and timing” to the wording: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” Chair Powell made clear that this was meant to indicate that – if the economy evolves as anticipated – they are at a point where it is appropriate to slow the pace of rate cuts.
• The new ‘dot plots’ show a median projection for the Fed Funds rate of 3.9% for 2025 (implying only 50bps of cuts from the current mid-point of the Fed Funds target range). In September that figure had been 3.4% (so implying 100bps of cuts). The forecasts still pencil in an additional 50bps of cuts in for 2026. Changes in the median economic forecasts are fairly minor except (importantly) for a higher inflation projection next year (2.5% from 2.1% previously). Note that in the press conference he seemed to attribute this more to recent inflation experience (than, for example, the potential impact of a Trump administration) where “once again” the year-end projection on inflation “has kind of fallen apart” as the end of the year approached.

[Powell] said that they want to see further progress on inflation and that as long as the economy and labour market are solid they can be cautious on further cuts.

The case for rate cut caution from here

Chair Powell was at pains to emphasise relative optimism – that the economy and policy were in a good place. Having cut 100bps they see their policy stance as still “meaningfully” restrictive, but significantly less so and think they can now be more cautious. Being closer to the neutral rate was cited by Powell as a reason for being more cautious.  

He described the decision this week as a “closer call”.

To cut further after this point, he said that they want to see further progress on inflation and that as long as economy and labour market are solid they can be cautious on further cuts.

At one point he described them as now at a new phase in the process – in the sense that they are significantly closer to neutral and from this point forward it is appropriate to move cautiously and look for further progress on inflation. He said that they are mindful though that the labour market is still gradually cooling and that was something they needed to keep an eye on.

Trump having an impact

On Trump and tariff/policy effects, Powell said that some FOMC participants had taken preliminary steps to incorporate “highly uncertain” effects of future policy in their forecasts, but this wasn’t unanimous, and some did not say whether they did or not. Prospects of policy changes also seemed to be bolstering the case for treading more cautiously via policy uncertainty (feeding through into inflation uncertainty and “when the path is uncertain, you go a bit slower.”). Powell said they are doing work/having discussions around the ways tariffs can affect an economy so that they are in a good position to react thoughtfully when they actually do see policy change.  

My current Fed Funds forecast implies 75bps of cuts (rather than 50bps), but there is a great deal of uncertainty around the US outlook next year given the change in administration and it will (probably) be easier to assess those risks as the Trump administration settles in.

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