The Federal Open Market Committee (FOMC) has already lowered its target interest rate by 25 basis points. This reduction reduces that rate down to a 3.75% to 4.0% range. This decision is consistent with the committee’s view of a changing balance of risks toward a negative risk to employment versus inflation. Certainly, the recent FOMC meeting provided clues with a very clear 10-0 vote on the coming rate cut. Only ten members voted for the cut, while two voted against the motion to cut. Chairman Jerome Powell underscored that the committee is at an impasse in regard to addressing the unprecedented economic situation. Most importantly, they pay special attention to whether to adopt preventive cuts in advance.
Powell’s remarks underscored a stark split on the committee. Some members advocated for preemptive rate cuts to safeguard against risks to employment, while others cautioned that such moves could exacerbate already escalating inflation. To emphasize, he added that this persistent distinction is important. The Fed needs to consider it as they begin to make plans for their next meeting in December.
Deliberations Within the FOMC
In delivering his remarks, Powell unmistakably sought to put distance between himself and the board’s more hawkish members. He agreed with their frustrations but maintained that a careful approach is necessary given current economic signs. Make no mistake—the Fed is undertaking an unprecedented and difficult challenge. On top of that, it has to operate in the dark due to the recent government shutdown, which has cut off access to critical, timely economic information. As it stands, the FOMC relies on alternative metrics, such as private data from ADP and insights from the Beige Book, rather than more recent official reports.
The committee’s most recent official data point is still the August employment survey. At present, they have to depend on secondhand intelligence to inform their decision-making. Powell reiterated that in the absence of consistent new data we need to be cautious in judging the state of the economy and how we should change policy. He is dedicated to leaving options available before the new meeting date. This two-pronged approach focuses on the Fed’s determination to stay ahead of rapidly evolving economic realities.
Economic Projections and Challenges Ahead
The FOMC’s decision comes as growth seems to be stubbornly strong. Recent estimates indicate that GDP growth may reach an annualized rate of 2.9% for the third quarter. The Atlanta Fed’s GDPNow is even more sanguine, calling for growth of 3.9%. Pre-shutdown Powell also recognized that there was “somewhat firmer than expected” growth path that adds a layer of complication when forecasting going forward.
In December, the FOMC will review the SEP. This task has proven difficult in recent years due to lack of data. The committee foresees one additional cut of 25 basis points as probably necessary. This decision is motivated by their wish to prioritize employment, more so as inflation expectations for future quarters have been pushed lower. This spike in energy prices represents a severe economic stress test and politically fraught consequences for the Fed’s intervention.
Inflation Concerns and Market Reactions
Just when you thought inflation was over and done with, the most recent Consumer Price Index (CPI) figures have caused analysts to rethink their predictions. They’ve lowered their peak inflation expectation — to 3.4% y-o-y by Q2 2026, from their prior 3.6% forecast. Core inflation forecast revisions have gone the same way, down from 3.7% to 3.3%. These adjustments signal a desire to remain ahead of an inflation surprise or develop trend that might require greater tightening of monetary policy.
Powell characterized the overall monetary policy posture as “moderately restrictive.” He agreed that there is need for more cuts, but emphasized that care must be taken. The Fed aims to steer monetary policy closer to neutrality, balancing between fostering employment and controlling inflation.