Weight of the White House

Federal Reserve Chair Jerome Powell declared policy is in a “new phase” in his comments after the FOMC meeting yesterday. He declined to name it, but the hawkish tone of the statement and forecasts suggests something like “Trump 2.0.”

While Powell has stated in the past that the Fed does not pre-emptively set monetary policy based on political rhetoric, one does have to wonder if President-elect Trump’s plans to restrict immigration, extend tax cuts and reduce government regulations influenced policymakers. They lowered the fed funds range by a quarter-point to 4.25-4.50%, but increased expectations for its level over the next two years by the significant amount of 50 basis points—putting the median rate at 3.9% and 3.4% in 2025 and 2026, respectively.

That combination is a textbook example of a hawkish cut and highlights the difficulty FOMC members have in gauging the new political reality. Interestingly, the 2-year Treasury yield, which should closely track the expected forward fed funds rate, is around 4.34%, implying the market is skeptical the rate cuts will actually occur.

This cut almost didn’t, according to Powell, who said the vote was a “close call.” It had one dissent in favor of no change (Cleveland Fed President Beth Hammack). In the Summary of Economic Projections, only five of the participants penciled in more than two 25 basis-point cuts next year, collectively indicating only 50 basis points of easing in all of 2025, much lower than recent projections. This likely takes a cut in January off the table. Long-term fed funds continued its slow climb to 3.0%, implying a neutral real rate of 1%.

The FOMC upwardly revised projections for core PCE, reflecting Powell’s comment that, while he is confident inflation will decline to the 2% target, it “could take another year or two.” Even for the noncommittal nature of a Fed chief, this is a wide range. But that’s the position the Fed is in because inflation has proved sticky and might even rise based on fiscal policy.

The Fed did not alter its gradual balance-sheet reduction policy, maintaining the Treasury roll-off cap at $25 billion and the mortgage-backed security cap at $35 billion. The market continues to expect policymakers to curtail quantitative tightening at some point in 2025. Lastly, the Fed decreased the overnight reverse repo rate by 30 basis points to 4.25%, removing the long-standing five basis-point floor over the lower bound of the target range.