Still from the content organized by the boss of 'Invisible SOL'!
The Federal Reserve announced a 25 basis point rate cut, lowering the target range for the federal funds rate to 3.5% to 3.75%, but this is still quite far from Trump's desired rate of below 2%.
If the brothers really think that the Federal Reserve will only cut rates once or twice in 2026, they are underestimating Trump's craziness.
In summary: The 25bps rate cut itself was in line with expectations, but the dot plot and information from the press conference were more dovish than the market anticipated.
This dovishness is reflected in three aspects.
Firstly, the 'hawkish dot plot' that the market feared (such as not cutting rates in 2026) did not materialize; the dot plot significantly raised economic growth expectations for 2026-2027, lowered inflation expectations, and maintained the expectation of a rate cut once a year, presenting a Goldilocks scenario.
The press conference was more dovish than expected. Powell seemed to return to the August Jackson Hole meeting, repeatedly emphasizing the risks of deterioration in the job market while downplaying the risks of rising inflation.
Third, starting December 12, there will be a technical expansion of the balance sheet (RMP), with an initial purchase amount of $40 billion per month, slightly exceeding expectations in both volume and timing.
1. Five key points on the FOMC.
1. What are the reasons and differences for a 25bps rate cut?
During the press conference, Powell clearly stated that the softening of the job market and the "expected decline" in inflation were reasons for further cutting rates by 25bps (rather than waiting until January) in the absence of data.
However, the differences have also increased. Compared to two dissenting votes in September (Miran suggested a 50bps cut, Schmid suggested no cut), there were three dissenting votes in this meeting, with Miran supporting a 50bps cut, and Schmid and Goolsbee suggesting no cut. Notably, there were also four "soft dissenters" at this meeting, predicting only two rate cuts in the dot plot for 2025 (which implies there shouldn't be a cut this month), but this wasn't reflected in the voting. This could include those who previously made hawkish statements but are not members of the 2025 voting committee (like Logan and Kashkari), or members who voted in favor despite the dot plot not supporting a rate cut (like Collins and Musalem).
2. What is the future path for rate cuts?
On one hand, the statement (as expected) released a signal of "wait and see, no rate cuts for now" for early next year. The statement changed the wording for adjusting the future rate path 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 was also seen in the FOMC meeting last December, usually indicating a wait-and-see approach in the short term. However, considering that the market originally expected only two rate cuts in 2026, it is not surprising that the Fed signaled a pause in rate cuts for early next year.
On the other hand, the dot plot still maintains the expectation of one rate cut in 2026 and 2027. Previously, the market was worried that due to a more optimistic GDP outlook and a recent general recovery in upstream commodity prices, coupled with internal disagreements within the FOMC, the Fed might adjust the 2026 rate cut expectation to zero.
3. What signals are there in the dot plot?
Maintaining the rate cut path, raising GDP forecasts and lowering inflation forecasts paints a very "Goldilocks" scenario (better growth, lower inflation, gradual rate cuts). Overall, the signal is neutral, but slightly more dovish compared to the market's previous hawkish expectations. Specific details include:
1) The expectation remains for one rate cut in 2026-27, which is the same as the September SEP.
2) The GDP forecast for 2026 was raised by 0.5pp to 2.3%. During the press conference, Powell indicated this was due to more optimistic expectations for productivity and consumption and investment activities.
3) The inflation forecasts for 2026 PCE and Core PCE were lowered by 0.2pp and 0.1pp to 2.4% and 2.5%, respectively, while the unemployment rate forecast remained unchanged.
4. What are the dovish signals from the press conference?
1) Clearly stating "the next step is not a rate hike" (when answering Nick's question).
2) Regarding employment, Powell made it clear that employment data has been weak and is overestimated (referring specifically to the QCEW annual revision). Throughout the press conference, Powell repeatedly stated that "job growth is actually negative," emphasizing its nonlinear deterioration risk.
3) On inflation, Powell reiterated that it is not a problem under the baseline scenario; tariffs are one-time impacts, and a weak job market means service sector inflation is also unlikely to rebound. ("Evidence is increasingly showing that service sector inflation is declining" and "commodity inflation is fully concentrated in tariff-affected industries").
Overall, Powell seemed to have returned to the Jackson Hole meeting at the end of August, re-emphasizing the "employment risk theory," which is good news for recently anxious investors.
5. How to understand the reserve management-type balance sheet expansion (RMP)?
Although it involves buying bonds, unlike quantitative easing (QE), the purpose of RMP is to ensure that the growth of reserves aligns with the natural growth of the banking system (demand), hence the purchase pace is relatively moderate. The FOMC announced that it will start purchasing at a pace of $40 billion on December 12, potentially maintaining a relatively high purchase pace in the short term, but gradually slowing down (based on Powell's statements, the expected average might be around $20-25 billion/month).
There are two underlying reasons.
1) Since October, liquidity pressures in the repo market have persisted (SRF usage has been consistently above zero, and the SOFR-ONRRP spread has remained above 15bps), thus the Fed believes that the current level of reserves meets the criteria of "ample but not excessive" for the end of balance sheet reduction, and it can initiate the next phase of natural balance sheet expansion.
2) The FOMC believes that the significant increase in TGA during the tax season in April next year will draw a large amount of reserves, hence proactively releasing liquidity in advance.
From a technical perspective, aside from a purchase pace and initiation timing slightly exceeding expectations, this RMP also allows for the purchase of short-term coupons with maturities of 1-3 years. This is a positive addition for the short end.
2. Press Conference Transcript
1. Howard Schneider (Reuters):
First, regarding the statement, to clarify our understanding. The insertion of the phrase "considering the extent and timing of additional adjustments" indicates whether the Fed is currently in a hold position until clearer signals emerge regarding inflation, employment, or economic developments?
Powell:
Yes, adjustments since September have placed our policy within a broad estimate of neutral interest rates. As we pointed out in today's statement, we are in a favorable position to determine the extent and timing of additional adjustments based on incoming data, evolving outlooks, and balanced risks. This new phrasing indicates that we will carefully evaluate incoming data. Moreover, I want to emphasize that since September, we have reduced the policy rate by 75 basis points, and by 175 basis points since last September, placing the federal funds rate within a broad estimate of neutral values, and we are in a favorable position to wait and observe how the economy evolves.
Howard Schneider (Reuters - Follow-up):
If I could follow up on the outlook, it seems that with increased GDP growth, along with easing inflation and a fairly stable unemployment rate, this appears to be a rather optimistic outlook for next year. What has led to this situation? Is it early bets on AI? Is there a sense of some productivity improvement? What is driving all this?
Powell:
There are many factors driving the forecasts. If you broadly look at external forecasts, you will also see many predictions showing a rebound in growth. Part of the reason is that consumer spending has held up remarkably well; on the other hand, AI-related data center spending has been supporting business investment. Overall, the Fed and external forecasters' baseline expectation is that growth will rebound from the relatively low level of 1.7% this year to 2.3% next year. I mentioned that the median growth in the SEP is 1.7% this year and 2.3% next year. In reality, part of this is due to the government shutdown. You can take 0.2 percentage points from 2026 and add it to 2025. So it should actually be 1.9% and 2.1%. But overall, yes, fiscal policy will be supportive, as I mentioned, AI spending will continue. Consumers continue to spend. So the baseline for next year looks robust.
2. Steve (CNBC):
Thank you, Mr. Chairman. You previously described rate cuts using a risk management framework. Following up on Howard's question, has the phase of risk management for rate cuts ended? Given the employment data we might receive next week, have you already taken sufficient "insurance" measures against potential weakness?
Powell:
Between now and the January meeting, we will receive a lot of data that will factor into our considerations. If you look back, we maintained the policy rate at 5.4% for over a year because inflation was very high, and the labor market was very robust. Last summer (2024), inflation fell, and the labor market started showing real signs of weakness. So we decided, as our framework indicates, when the risks to both targets become more balanced, you should shift from a tendency to manage one (which was inflation at that time) to a more balanced and neutral stance. So we did that. We made some rate cuts, then paused for a while to observe what happened in the middle of the year, and then resumed cuts in September. We have now cut a total of 175 basis points. As I mentioned, we feel that the current positioning allows us to wait and observe how the economy evolves from here.
Steve (CNBC - Follow-up):
If I could follow up on the SEP, you forecast a significant increase in growth numbers, but unemployment does not drop significantly. Is there an AI factor in this? What is the momentum behind getting more growth without a significant drop in unemployment?
Powell:
This indicates higher productivity. Part of this may be due to AI. I also believe productivity has structurally increased over the past few years. If you start to think of it as 2% per year, you can maintain higher growth without creating more jobs. Of course, higher productivity is also what drives income increases over a longer period. So this is fundamentally a good thing, but that is indeed what it means.
3. Colby Smith (The New York Times):
Today's decision clearly saw significant divisions. Not only were there two formal dissenters against the rate cut, but also four "soft" dissenters. I wonder if the reluctance of these members to support a recent rate cut indicates that the threshold for a rate cut has become much higher. If the current situation is good, what does the committee actually need to see to support a rate cut in January?
Powell:
As I mentioned earlier, the situation is that our two targets are somewhat in tension. Interestingly, everyone at the FOMC table agrees that inflation is too high and we want it to come down; at the same time, everyone agrees that the labor market is weak and there are further risks. Everyone agrees on that point. The disagreement lies in how to weigh these risks, what your forecasts look like, and where you believe the greater risks ultimately lie. Having this ongoing tension between targets is quite rare, and when you encounter such situations, you see the current state of affairs. This is actually what you would expect to see. At the same time, our discussions are very thoughtful and respectful. Everyone has strong views, and we come together to reach a place where we can make decisions. We made a decision today. Nine out of twelve supported it, so the support base is quite broad. But it is not like everyone agrees on the direction and actions as in normal circumstances. This time, opinions are more dispersed, and I think that is just inherent in this situation.
As for what conditions are needed, we all have outlooks for the future. But I believe ultimately, since we have already cut rates by 75 basis points, and the effects of these cuts are just starting to show, we are in a favorable position to wait. We will receive a lot of data. By the way, regarding the data, we need to be cautious in our evaluation, especially household survey data. For very technical reasons (data collection methods), this data may be distorted, not just volatile, but skewed. This is because data collection was not done for half of October and November. So we will have to look closely, with a skeptical eye. Nonetheless, by the January meeting, we will have a lot of December data.
Colby Smith (The New York Times - Follow-up):
Regarding dissent, given the complex economic situation we are in, is there a moment when these dissenting opinions could become counterproductive, whether in terms of the Fed's communication or conveying information about the future policy path?
Powell:
I don’t think we have reached that point. I would reiterate that these are all good, thoughtful, and respectful discussions. You will hear many people, including external analysts, say the same thing: "I can argue for either side." This is a balanced judgment. We have to make decisions. In the current situation, if you look at the SEP, you will find that many people agree that the risks to unemployment are skewed upward, and the risks of inflation are also skewed upward. So what do you do? You only have one tool and cannot do two things at once. So, at what speed do you move? How large is the move? This is a very challenging situation. I believe we are in a good position to wait and observe how the economy evolves.
4. Nick Timiraos (The Wall Street Journal):
Recently, there has been some discussion about the 1990s. In the 1990s, the committee conducted two independent sequences of rate cuts, each by 75 basis points (in 1995-96 and 1998). After each, the next action on rates was an increase rather than a decrease. Given that policy is now closer to neutral, is the next rate action inevitably a decrease? Or should we consider that policy risk is genuinely two-sided from now on?
Powell:
I don't think a rate hike is anyone's base case at the moment. I haven't heard that being said. What you see is that some feel we should stop here, that we are in the right position and just wait. Others feel we should cut rates once or more this year and next. But when people write down their policy estimates, it is either to stay here, a small cut, or a bit more of a cut. I do not think the base case includes a rate hike. You are correct that those two instances in the 90s did turn after three rate cuts.
Nick Timiraos (The Wall Street Journal - Follow-up):
If I could follow up, unemployment has been rising very slowly for most of the past two years, and today's statement no longer describes unemployment as "staying low." What gives you confidence that it won't continue to rise in 2026, especially considering that sectors sensitive to interest rates, like housing, still seem to feel the restrictive nature of policy?
Powell:
I think the current thinking is that since we have already cut by 75 basis points, the policy is within a reasonable estimate of neutral rates, which would stabilize the labor market, or only rise a point or two more, but we won't see any drastic declines; we are not seeing any evidence of that at the moment. At the same time, policy is still not in an accommodative state. We feel progress has been made this year on non-tariff-related inflation. As the effects of tariffs become apparent, they will show up next year. But as I said, we are in a favorable position to wait and see how results unfold.
5. Claire Jones (Financial Times):
Many interpret your comment at the October meeting - "We slow down when things are unclear" - as not cutting rates now, but cutting in January. So I would like to know why the committee decided to act today instead of waiting until January?
Powell:
At the October meeting, I stated that there was no certainty of action, and that is indeed correct. Why did we act today? I will point out a few points. First, the gradual cooling of the labor market continues. The unemployment rate rose by 0.3 percentage points from June to September. Since April, employment has averaged an increase of 40,000 per month. We believe these numbers are overestimated by about 60,000, so it may actually be a decrease of 20,000 per month. Moreover, both household and business surveys indicate a decline in worker supply and demand. So the labor market continues to cool gradually, perhaps even faster than we thought.
Regarding inflation, the data has come in slightly lower. Evidence increasingly shows that service sector inflation is declining, but this is offset by rising commodity prices, and commodity inflation is fully concentrated in tariff-affected industries. Currently, over half of the excess inflation comes from commodities, which are tariff-related. We have to ask, what are our expectations regarding tariffs? To some extent, it depends on whether we see a broader economic overheating. We see that wage growth reports do not indicate that kind of overheating economy that generates "Phillips curve" inflation. Considering all these factors, we made this judgment.
Claire Jones (Financial Times - Follow-up):
Regarding reserves, how concerned is everyone about the tightness we see in the money market?
Powell:
I wouldn’t say "worried." The reality is that balance sheet reduction (QT) has been ongoing. The overnight reverse repo facility (ON RRP) has nearly dropped to zero. Then starting from September, the federal funds rate began to rise within the range, nearly reaching the interest rate on reserves (IORB). There is no issue with that. This tells us that we are indeed within a system of ample reserves. We knew this would come. When it finally arrived, it was a bit faster than expected, but we are absolutely prepared to take the actions we have stated. These actions are what was announced today: the resumption of reserve management purchases. This is entirely separate from monetary policy; it is just that we need to maintain an adequate supply of reserves.
Why such a large scale ($40 billion)? Because April 15 (tax day) is approaching. People are paying a lot of money to the government, and reserves will drop sharply and temporarily. This seasonal accumulation would happen anyway. Additionally, the long-term sustained growth of the balance sheet requires us to increase by about $20-25 billion per month. So this is just preparing for the tax season in mid-April.
6. Andrew:
This is the last FOMC press conference before an important Supreme Court hearing next month. Can you talk about how you hope the Supreme Court will rule? I'm curious why the Fed is so silent on this critical issue.
Powell:
Andrew, this is not something I want to discuss here. We are not legal commentators. This is under judicial review, and we believe that participating in open discussions is not helpful.
Andrew (Follow-up):
Then let me ask another question (Mulligan). I want to return to the question about the 1990s. Do you think that is a useful model for thinking about the current economic situation?
Powell:
I don't think it has risen to that level. This is such a unique situation, not like the 1970s, but there is indeed tension between our two goals. This has been unique during my tenure at the Fed. Our framework states that when this situation arises, we should take a balanced approach. This is a very subjective analysis. It basically tells you that when both targets are equally threatened, you should maintain some neutrality. We have been moving towards neutrality. Now we are in the neutral range, and I would say at the high end of the neutral range. Coincidentally, we have cut rates three times. We haven't made any decisions regarding 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 price increases from tariffs will fully transmit within the next three months? Is this a six-month process? Because of this, is employment a threat to the economy?
Powell:
Regarding tariff inflation, first, tariffs are announced, then they start to take effect, and then it takes a few months. Commodities may need to be transported, and it can take a significant amount of time for individual tariffs to be fully effective. But once the impact occurs, the question is, isn’t this just a one-time price increase? If we assume that no new significant tariffs are announced, commodity inflation should peak around the first quarter of next year. It shouldn’t be very large after that. If there are no new tariffs thereafter, we should start to see inflation decline in the second half of next year.
Edward Lawrence (Follow-up):
I want to ask about the elephant in the room (the obvious question). The president is publicly discussing new candidates for the Fed chair. Does this hinder your current work or change your thoughts?
Powell:
No.
8. Michael McKee (Bloomberg):
The 10-year rate is 50 basis points higher than it was when you began 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 lower that yield which drives the economy the most?
Powell:
We are focused on the real economy. When long-term bonds fluctuate, you have to look at the reasons. If you look at inflation compensation (breakeven inflation rates), they are at very comfortable levels, consistent with 2% inflation. So the rise in rates is not due to concerns about long-term inflation. It must be other reasons, like expectations for higher growth. We also saw significant fluctuations at the end of last year, which were unrelated to us but were driven by other developments.
Michael McKee (Follow-up):
You mentioned that the public expects you to return to 2%, but the vast majority of Americans list high prices and inflation as their top concern. Can you explain to them why you prioritize the labor market (which seems relatively stable for most) over their top concern - inflation?
Powell:
We hear clearly through a broad network of contacts that people are experiencing high costs. This is actually high costs, many of which are not the current inflation rate, but the embedded high costs caused by high inflation in 2022 and 2023. The best thing we can do is restore inflation to the 2% target while having a strong economy that allows real wages to rise. We need a few years for nominal wages to exceed inflation so that people can start to feel good about affordability. We are working to control inflation while also supporting the labor market and strong wages.
8. Victoria (Politico):
This is the third rate cut this year, with an inflation rate of about 3%. The message you want to convey is that as long as people understand you still want to return 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, and difficult situation, and the labor market is also under pressure, with job creation potentially being negative. The supply of labor has also significantly decreased. This is a labor market that seems to have significant downside risks. People are very concerned about this. The current inflation story is that if you exclude tariffs, the inflation rate is just above 2%. So tariffs are indeed driving much of the inflation overshoot. We believe this is a one-time effect. Our job is to ensure it remains a one-time effect. If inflation is high but the labor market is very strong, rates would be higher. But right now, we face two-sided risks.
9. Elizabeth Schulze (ABC News):
Following up, you have consistently said that job growth is negative. Why do you believe job growth is much worse than indicated by official data?
Powell:
Real-time estimates of job growth are very difficult. They cannot account for everyone. There has always been systematic overestimation. They revise twice a year. The last revision, we expected an adjustment of 800,000 to 900,000, and it indeed occurred. We believe this overestimation is still ongoing and will be corrected. We estimate about 60,000 overestimation per month. So 40,000 job growth might actually be negative 20,000. But this is somewhat also a result of a significant decrease in labor supply. In a world where there is no growth in workers, you really do not need many job openings to achieve full employment. But I think in a world where job creation is negative, we need to observe very carefully to ensure policy does not suppress job creation.
Elizabeth Schulze (Follow-up):
Regarding supply, we see large employers like Amazon laying off workers citing AI. To what extent are you currently factoring in AI into the weakness of the job market?
Powell:
This may be part of the story, but not the majority. If there were significant layoffs, you would expect continuing claims for unemployment insurance and new claims to rise. But in reality, they have not. This is somewhat strange. In the long run, AI may boost productivity and create new jobs. But we are still in the early stages, and we have not seen much reflection of that in the layoff data.
10. Enda Curran (Bloomberg):
Given the broad range of views within the policy committee, why are there such significant differences among the views of the Reserve Bank president and board members?
Powell:
It’s not that stark. There is also a lot of diversity within each group. I do not think this is a divide between two camps.
Enda Curran (Follow-up):
If the Supreme Court overturns the tariffs currently under review, what economic impact would that have on growth and inflation?
Powell:
I really don’t know. It depends on many things we do not know.
11. Christine Romans (NBC News):
I want to ask about the K-shaped economy. High-income families supported by home equity and stock market wealth are driving spending, while low-income consumers are struggling due to rising prices over the past five years. Is this so-called K-shaped economy sustainable?
Powell:
We hear this often. Consumer reports from companies facing low-income groups all indicate that people are tightening their belts. Meanwhile, asset values (real estate, securities) are very high and are often owned by high-income individuals. I do not know if this is sustainable. Most consumption is indeed driven by those with more means. From a societal perspective, having a strong labor market over the long term is very beneficial, and this helps those at lower income levels. This is the state we all want to return to.
Christine Romans (Follow-up):
Regarding the housing market, which remains weak. With these rate cuts, do we have a chance to see increased affordability in the housing market? The median age of first-time homebuyers is now 40, a record high.
Powell:
The housing market faces significant challenges. I do not believe that a 25 basis point cut in the federal funds rate will have much impact on people. Housing supply is low. Many people have extremely low mortgage rates from the pandemic, making moving expensive. Additionally, our country has long faced a structural shortage of housing. This is a structural housing shortage problem. We can raise and lower rates, but we really do not have the tools to address the long-term structural housing shortage.
12. Chris Rugaber (AP):
Wage growth is slowing. Where are the inflation risks? If inflation is cooling while hiring may be negative, why are we not hearing more about rate cuts?
Powell:
The inflation risk is clear, namely tariff inflation. Most of us expect this to be a one-time effect. But the risk is that it could prove more persistent than expected. Another less likely possibility is traditional inflation due to economic overheating. I do not find this particularly likely. The committee has different assessments on this.
13. Neil Irwin (Axios):
Do you believe we are experiencing a positive productivity shock (whether from AI or policy)? To what degree has this driven the higher GDP forecast in the SEP?
Powell:
Yes, I never thought I would see consecutive years of 2% productivity growth. It has definitely increased. If you look at what AI can do, you can see the prospects for productivity. This could make those who use it more efficient and may force others to look for other jobs. So yes, we are certainly seeing higher productivity.
14. Matt Egan (CNN):
After today, you have only three meetings left at the helm of the Fed. Have you thought about what legacy you hope to leave?
Powell:
My thought is that I really want to hand over this job to my successor with the economy in very good shape. I want inflation under control, back to 2%, and I want a strong labor market. That is what I want to achieve.
Matt Egan (Follow-up):
After your term as chair ends, do you plan to stay on the board of the Fed?
Powell:
I am focused on the remaining time I have as chair. I have no new information to share on that.
15. Mark Hamrick (Bankrate):
Despite many price levels still being high, rate cuts mean savings rates (yields) have peaked while borrowing rates remain high. Many Americans face liquidity or emergency savings challenges. Is this merely collateral damage, or is it an unintended consequence of your tools being limited in addressing household liquidity constraints?
Powell:
I disagree that this is collateral damage from our policy. Over time, what we are doing is aimed at creating price stability and maximum employment, which is very valuable for everyone. When we raise rates to reduce inflation, it does indeed work by slowing down the economy, but we have already brought the policy rate back to a level that is no longer strongly restrictive. I believe this is to help people move past the impact of high inflation. We have actually fared better than any other country in navigating this wave of global inflation. This is due to the exceptional nature of the American economy. Thank you all.
Final personal opinion:
The median of the Fed's dot plot also indicates: one rate cut in 2026, one rate cut in 2027, and holding rates steady in 2028.
Many institutions also believe the rate cut in 2026 will be smaller than in 2025.
But I do not think so, as rate cuts are not an economic issue but a political one.
Trump has done everything possible to win the midterm elections in November 2026 and lay a good foundation for the next election.
For example, he has recently modified the district maps in several states to weaken the Democrats' advantage and expand the Republicans' advantage.
If you think the Fed will only cut rates once or twice in 2026, you are underestimating Trump's madness.
In five months, the Fed chair will change, and the criteria for selecting the person will be loyalty to Trump. So my estimate is that even if Powell only cuts once in the next five months, the new Fed chair will continue to cut rates, possibly even implementing a double cut (once by 50 basis points).
