Fed Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

This was one of the most interesting setups for an FOMC meeting, if only for the personnel drama. Stephen Miran just finished his Welcome video and first HR meeting, joining as the newest Board of Governors member. Lisa Cook is about to have the Supreme Court weigh in on her potential firing. Meanwhile a few members of the Committee are jockeying to replace Chair Powell next year, all while the White House is calling him names.   

Chair Powell’s Jackson Hole speech on 8/22 was basically a final draft for the FOMC statement and his presser Q&A. In that speech he led off with “…the balance of risks appears to be shifting…”, paving the way for today’s numerous comments about downside employment risks outweighing upside inflation risks. He even reiterated the “reasonable base case that effects (of tariffs) will be relatively short-lived.   

As widely expected, the Federal Reserve cut rates by 25bps. The language in the statement also evolved as expected. There was a slight downgrade of economic activity and an acknowledgment of the slowdown in job growth. As Chair Powell did at Jackson Hole, the Committee elevated this side of the mandate by adding “downside risks to employment have risen”. The Committee acknowledges the increase in inflation but continued to categorize it as “somewhat elevated”. The forward guidance evolved in a more dovish way suggesting additional cuts are on the horizon with the following change, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate.” The balance sheet runoff was left unchanged. The relative lack of dissention stood out, but the MAC Desk’s favorite Fed Whisperer Nick Timiraos could have been working his magic with an article published last night that detailed the “weirdness” of today’s event. The most interesting part of the article was where it discussed the development of the policy statement. Specifically, “Officials who don’t fully support the immediate decision sometimes stay within the majority to maintain their influence over the language that explains the decision or signals future moves. But when officials dissent—formally registering their disagreement—they can forfeit their ability to shape those crucial communications.” Basically, if you make too many policy waves you get kicked out of the statement boat. Miran is obviously an outlier in several ways here, but that protocol could explain the lack of dissention from others, most notably Waller and Bowman, as well as the lack of other members that were on the fence moving to a more dovish stance, at least outright. In a follow up paragraph from the article, “…if officials who dissented for cuts in July support Powell’s decision this time, they could gain more leverage over leaving breadcrumbs about future rate cuts.” With the blackout period ending tomorrow we’ll get to hear more personal views from Fed officials.

Within the SEP there were tweaks to the economic forecasts with modest increases to GDP in both 2025 and 2026. The unemployment rate for 2025 remained at 4.5% and is projected to tick down over the next two years, a 0.1% improvement since June. The 2025 inflation forecast was unchanged but is expected to moderate less than previously expected. Core-PCE is estimated to be 3.1% at the end of this year and to fall to 2.6% next year (previously 2.4%).

Not surprisingly, the DOT plot provided the most intriguing analysis. However, as predicted it wasn’t hard to identify Stephen Miran. He was a clear outlier in 2025 calling for an additional 5 cuts through year end. There was another outlier, presumably not a voter otherwise they would have dissented today, that saw rates at 4.5% at year-end. Otherwise, 6 officials projected no additional cuts this year, 2 expected one, and the rest of the Committee is angling for two. That caused the median DOT to signal two additional cuts this year, in line with expectations. However, there was a wider and more disperse range of views for 2026 ranging between 2.5% - 4% and the median projection only calling for one additional cut next year. 

The initial market response to the prepared materials was a move higher in equities while yields moved lower. However by the time the press conference began the S&P 500 was trading back around session lows and yields started to move off their lows.

While the debate in the room was probably quite interesting the press conference was really more of the same. Chair Powell reiterated much of what he said at Jackson Hole with a couple of tweaks. In Jackson Hole he elevated the balance of risk for the labor market. Today he said he could no longer call the labor market “solid” and he once again laid out all of the contributing factors: uncertainty, tariffs, immigration and AI. He also pointed to the unique situation with both labor supply and demand  slowing, highlighting that with slower job creation, if layoffs begin the unemployment rate could start to move up quickly.

In terms of inflation, Powell maintained the base case is for tariffs to be a one-off increase but did reiterate the importance of insuring that one-time didn’t become an ongoing problem. He also suggested that while inflation is expected to move higher in the near term, he believes that the upside risk to inflation has decreased. Over the last year he has said that monetary policy has been modestly restrictive and today he noted the shifting balance of risks supports a move in the direction of neutral. However he didn’t think that a 25bp cut would have a large impact, while also noting that there was not widespread support of a bigger cut at this meeting. He once again said he didn’t see a need to move rates quickly and described this as a “risk management cut” similar to last year.

Regarding forward guidance, he didn’t offer too much new either, acknowledging that the uncertain backdrop makes forecasting very difficult and he maintained optionality by saying that the Federal Reserve will make decisions meeting by meeting driven by the totality of the data. He was asked about allowing the balance sheet to run off while cutting and noted that this was marginal at this point and reserves were still abundant. Not surprisingly the Chairman danced around the other spicy questions related to Fed independence.

Since the spring, the MAC Desk has been evolving the analogy of the Federal Reserve setting the table for rate cuts to begin in the fall. This has been a slow process seemingly frustrating investors in the short-term along the way. After Jackson Hole there were some passed hors d’oeuvres. Today with the prepared materials there was some disappointment that shellfish towers weren’t showing up at the table. The meal itself wasn’t from a Michelin five-star restaurant either, but the service was good and the meal hit the spot.

Despite some volatility, equity markets ended pretty much where they were heading into the meeting. After the initial move lower Treasury yields also moved higher ending up 4-7bps across the curve. Small caps gave up some of the earlier outperformance as did some of the housing related stocks while financials benefitted from the expectation of a measured rate cutting cycle. 

While this was the main course this week, we still have a few side dishes on our plate. Taiwan and the BOE will hold their own rate decisions tomorrow, with the BOJ tomorrow night. Weekly jobless claims will be a key event given all the labor discussions. The Philly Fed Manufacturing index will also be out. Earnings tomorrow include FedEx and Lennar, providing views on macro business conditions and the housing market, respectively.    

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