November 2024 FOMC Meeting Postmortem

The Fed cut rates today, but signals from their statement and Chair Powell's remarks suggest a possible cut next month, but a lot less easing in 2025.

As expected, the Fed cut rates by 25bps but used the post-meeting statement and press conference to signal its concern with the slowing disinflation momentum since the summer. We likely get another 25bps cut at the December FOMC meeting, but today’s post-meeting statement and press conference signaled an increased likelihood that the Fed will soon shift to a slower pace of policy rate easing.

Key takeaways:

• The FOMC cut the Fed funds target range by 25bps to 4.50%-4.75%. There was no change in the pace of reductions of the Fed’s holdings of Treasury and mortgage-backed securities

• The statement following the rate decision signaled some concern with inflation since August. There’s still a bias to lower rates in the near future, but the Fed is quickly approaching the point at which it will dial down the pace of rate easing with possible prolonged skips between rate changes.

• Regarding his own future Chair Powell made crystal clear that he would not comply with calls for him to resign or to accept a demotion, citing that these moves are not allowed under current law. This might also mean a more hawkish Fed in 2025, as it is eager to defend its independence.

• A further December rate cut remains the modal expectation, but at that meeting they likely will upgrade their real activity projections while dialing down their projections for inflation. The December SEP will likely be used to pave the way for A LOT LESS cuts next year, less than what was embedded in the September SEP.

Decision, Post-Meeting Statement and Post-Meeting Press Conference

As expected, the FOMC decided to keep the Fed funds rate target range at 5.25%-5.50%. As foreshadowed in my preview for today’s meeting, changes to the post-meeting statement mainly pertained to inflation and reflected the recent slower disinflation momentum over the past three months:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In light of the progress on inflation and the balance of risks In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/2 1/4 percentage point to 4-3/4 to 5 4-1/2 to 4-3/4 percent. In considering 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. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against this action was Michelle W. Bowman, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.

FOMC Statement, July 31, 2024 (with annotations relative to the November FOMC statement).

As becomes apparent from the annotated statement above (with highlighted differences relative to the June statement), the Fed is signaling a concern with a slowing disinflationary momentum over the past three months.

Chair Powell’s remarks at the post-meeting press conference generally reinforced the above outlined interpretation, with the Chair citing the large-scale upward NIPA revisions, which in particular impacted the August PCE report, as one of the main reasons that the FOMC will likely downgrade some of the downside risks that were embedded in the September Summary of Economic Projections (SEP).

Not surprisingly, Chair Powell fielded a lot of questions with regards to the election results. Equally unsurprising, the Fed chair made clear that “[w]e don’t know these new economic policies and we don’t speculate what they will be”. Adding that over time potential policy changes might affect the economy, which would then be the appropriate time to take into account these new economic policies. More revealing were his remarks regarding his own future as Board of Governor chair. Citing current laws regulating the Federal Reserve, he made crystal clear that he would refuse to step down from his position when asked to by the new administration nor would he comply with any demotion of his position. Expect a more combative Fed eager to protect its independence during the remainder of Chair Powell’s term, which on net will mean a more hawkish Fed in 2025.

As expected, Chair Powell had to address at the post-meeting press conference questions with regards to the sharp rise in long-term interest rates since the last FOMC meeting (chart above). As of November 6, the 10-year Treasury bond yields had risen about 75bps since September 18. Different concerns regarding higher long-term rates were raised, ranging from potentially damaging for growth to reflecting increasing long-term inflation expectations. In response, Chair Powell referred to “internal model decompositions“, which at the moment showed that for now these moves were not reflective of any of these concerns.

Indeed, using publicly available interest rate decomposition models¹ it is clear that about half of the bond yield increase since the September FOMC meeting was due to a rising term premium (gray and orange lines in the chart above). These higher premia for the risk to hold bonds over the next 10 years more likely than not reflects increased uncertainty regarding the fiscal and inflation consequences of the economic policies of a new administration, and could, as Chair Powell alluded to, unwind once more clarity is provided over the coming months.

On the other hand, there’s a typical Fed view that persistent term premium-driven increases in interest rates reflect tightening financial conditions:

“Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal. Thus, if term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening to achieve the FOMC’s objectives.

The persistence of all these changes also matters. If technical factors are temporarily raising term premiums, for example, monetary policy shouldn’t overreact.“

L. Logan, “Financial conditions and the monetary policy outlook“, October 9, 2023.

This means that prolonged higher term premiums could, in the Fed’s view, adversely impact economic activity, strengthening the case for a downward calibration of the Fed's policy stance. Something to keep in mind.

Beyond Today’s Meeting

In my November FOMC preview I noted that the signaling by Fed officials at the September FOMC meeting and thereafter through public statements has already made the impact of monetary policy substantially less restrictive and close to neutral.

Indeed, with current nominal short-term interest rate pricing and “Main Street” inflation expectation at around 2.5%-2.6%, the perceived policy stance of the Fed has aligned well with how the Fed sees the restrictiveness of its stance for the year ahead (chart above). Validating this perceived policy stance by means of a path of well-timed, moderate rate cuts seems to be the Fed’s current modus operandi. It’s for this reason Chair Powell emphasized after today’s meeting that while indeed a slower rate of policy easing might be appropriate, “[w]e wouldn’t want to go too slow on policy easing as to endanger the current strength of the labor market”.

On balance, a 25bps rate cut in December remains my modal outlook (as I outlined in my preview), but today’s signaling indicates a substantial slowdown in the pace of rate cuts in 2025 with a cumulative Fed funds rate easing that’s likely less than the 100bps projected in the September SEP.

1. Adrian, T, R. K. Crump, and E. Moench (2013), “Pricing the term structure with linear regressions.“, Journal of Financial Economics, Vol. 110, pages 110-138, and Christensen, J. H. E., F. X. Diebold, and G. D. Rudebusch (2011), “The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models.”, Journal of Econometrics, Vol. 164, pages 4-20.