Time to Slow Down (cuts) While Flying Blind (no data)?
Powell pushed back on December expectations while QT is coming to an end
Summary
- As expected, and priced-in, the FOMC cut rates by 25 bps to a target range of 3.75-4.00%. There were two dissenters, Jeffrey Schmid, who preferred to keep the Fed Funds rate unchanged, and Stephen Miran, who voted again to cut by 50 bps. The FOMC announced the end of QT as of December 1. In a separate announcement, the Committee stated that reinvestment of agency debt and MBS holdings will be based on anticipated principal paydowns in the current month, with proceeds used to purchase will Treasury bills with maturities of up to one year.
- In general, Powell’s message at the press conference was more hawkish than our expectations. He clearly pushed back on the market pricing in rates cuts of nearly 100% of 25bp cut for December. Furthermore, we were wrong to believe that the Fed could also have signaled so soon the future reserve management tools as well as invest MBS proceeds across the curve (to be more neutral with current Treasury debt issuance). The Fed has introduced optionality. We will be watching the minutes and future speeches for some guidance. We still argue that the labor market warrants more rate cuts, but the risk is the Fed skips meetings ahead.