Fed Review: Powell & Co. tap the brakes
2min read The Federal Reserve delivered a widely expected quarter-point rate cut, bringing the federal funds target range to 4.25%-4.5%. This marks a full percentage point reduction from the peak earlier in 2024 as the Fed shifts towards recalibrating policy to less restrictive levels. Chair Jerome Powell emphasized that the Fed’s policy rate is now meaningfully restrictive and “well-calibrated” to continue making progress on inflation while maintaining a resilient labor market.
A key element of the meeting was the updated Summary of Economic Projections (SEP), which revealed significant adjustments to the Fed’s outlook. The median projection for the federal funds rate in 2025 increased to 3.9% (from 3.4% in September), and for 2026, it rose to 3.4% (from 2.9%). These changes reflect expectations for a slower pace of rate cuts, potentially signaling a Fed’s “higher for longer” stance. Additionally, inflation forecasts were revised higher for both headline and core measures, with PCE inflation projected at 2.4% for 2024 and 2.8% for core PCE, suggesting persistent challenges in achieving the 2% target.
The Fed introduced a subtle but important change to its language, adding “extent and timing” in its statement regarding further rate adjustments. This shift implies a more cautious and data-dependent approach, reinforcing the idea of a pivot to slower policy changes. Powell highlighted that while the Fed remains on track to cut rates further, decisions will be based on incoming data and inflation progress, reflecting lingering uncertainty about the trajectory of inflation and economic growth.
The meeting also revealed deeper divisions within the Federal Open Market Committee (FOMC), as evidenced by the four dissenting dots in the dot plot. These suggest that multiple participants were in favor of maintaining the previous rate or opposed to the pace of projected cuts, signaling an undercurrent of disagreement about the Fed’s path forward. While Powell downplayed the likelihood of a rate hike in 2025, he did not rule out the possibility, keeping options open as inflation remains above target.
Market reactions to the Fed’s decision were pronounced, with major indices declining sharply. The Dow Jones Industrial Average fell over 1,100 points, while Treasury yields surged, with the policy-sensitive 2-year yield rising to 4.3%, above the Fed’s target range. Futures pricing adjusted to reflect expectations of slower and more measured rate cuts in 2025 and beyond, aligning with the Fed’s updated guidance.
The higher inflation forecasts underscore the Fed’s ongoing struggle to bring inflation down to its target. Powell acknowledged that inflation progress has been slower than anticipated, with recent volatility in goods prices and stubbornly high non-market services inflation contributing to elevated levels. While the housing component has shown gradual improvement, its deceleration remains slower than hoped. These dynamics suggest that inflation could remain elevated in the near term, challenging the Fed’s ability to ease rates further.
From an economic standpoint, the Fed upgraded its real GDP growth projection for 2024 to 2.5%, a notable increase from September’s forecast of 2.0%. However, growth is expected to slow to its long-term trend of 1.8% by 2026. The unemployment rate projections for 2024 and 2025 were revised downward, reflecting a labor market that remains strong but continues to gradually cool.
Investors will need to watch key inflation metrics closely, particularly core PCE inflation, as the Fed has emphasized its reliance on data to guide future rate cuts. The evolution of the labor market will also be critical, as Powell noted that job creation has slowed and the job finding rate is declining, yet the market remains resilient.
Supply and demand dynamics in fixed-income markets are another factor to monitor. Treasury yields have risen sharply, indicating skepticism about the Fed’s ability to cut rates aggressively. This divergence between market expectations and the Fed’s projections could add volatility to financial markets, especially as the Fed remains cautious about maintaining a balanced approach to monetary easing.
Moving forward, the key question for investors is whether the Fed’s “higher for longer” stance will continue to weigh on growth-sensitive sectors or if inflation progress will allow for a more dovish shift. The Fed’s willingness to adapt policy in response to incoming data remains a cornerstone of its strategy, making each economic release critical in shaping market sentiment and Fed expectations.