Jay $ did his best to deliver holiday gifts to everyone in his standard purple tie. The actual cut itself, a hawkish sentiment, and T-bill purchases for reserves/liquidity. October 2022 was the last time floating rates were at this level. Ahhh the good ole days…
It sounded to me like the Fed is on hold until it is clear the wheels have fallen off the labor market. Powell said “Cuts over the last year bring us within a range of what most consider to be neutral” and then later, “We are at the high end of the range for neutral.” That’s him signaling the next cut will require more labor market weakness. The “normalization” process has ended.
2026 Dots
- Median dot projects just 1 cut next year
- 3 dissents (most since 2019)
- Another 4 signaled that they really didn’t want to cut
- 7 said no cuts next year
- 3 said rate hikes
When anonymous (via the dots), six members said no cuts today. But on the record, only Goolsbee and Schmid voted against a cut.
Did the Fed preemptively cut in expectation for a weak jobs report next week? Here’s what Powell noted:
- “Conditions in the labor market appear to be gradually cooling”
- “Labor demand has clearly softened”
- “The Birds should fire Kevin Patullo”
- “Recent cuts should help stabilize the labor market”
But the real zinger was this: “Payrolls since April have averaged 40k per month, but we think that’s an overstatement by 60k, which is negative 20k per month.”
Holy schnikes, the Fed has finally caught up to the bogus labor data!!!!
Bloomberg Chief Economist Anna Wong: "Even though the dot plot shows just one 25bps cut in 2026 (markets are pricing two), our view is that the Fed will end up cutting by 100bps next year...we anticipate weak payroll growth and scant signs of an inflation resurgence."
The first meeting in 2026 with odds of a cut exceeding 50% is April. There’s a 35% probability that FF is below 3% by year end 2026.
If the Fed is on hold, why are front rates down? Because the Fed also said it will begin Treasury Bill purchases on Friday. The Fed plans on $40B per month for several months…maybe right up until when Powell steps down in May and Trump’s Chair can ramp up purchases even more?
Powell said repeatedly that this action is not QE…pinky swear promise…and said more than once that this was for the “sole purpose of maintaining ample reserves.” Definitely not QE…just like it wasn’t in 2019…
As I have stressed repeatedly, whether Powell remains on the Board of Governors beyond May (because he’ll have two years remaining on that appointment) has a significant impact on the dove/hawk sentiment next year. When asked about what he plans to do, he said, “I don’t have anything new to report on that.”
Front end rates are down 7bps, the T10 is down 5bps. This is the market saying, “Whew, that wasn’t as bad as it could have been.”
I heard him exclaim, ere he drove out of sight, "A 25bps cut for all, and to markets good night!"
