Notes From the Desk: FOMC Meeting – Fog Advisory
As expected, the Fed cut rates by 25 bps, taking the Fed Funds rate to 4.25%-4.5%. More interesting was the change in their projections, with a slower pace of cuts and a modestly higher endpoint.
In his press conference, Jerome Powell’s economic forecast was for ‘foggy’ conditions ahead, warranting a more cautious approach.
The summary of Economic Projections (SEP).
Overall, the SEP was more hawkish than the market expected.
- The FOMC now only sees two cuts next year instead of four.
- The forecast for two cuts in 2026 remains unchanged.
- The median estimate of the neutral rates rises from 2.9% to 3%.
- The expectation for the 2025 unemployment rate dropped from 4.3% to 4.2%.
- Next year’s inflation forecast rose from 2.1% to 2.5%.
Our observations.
- The Fed is more concerned with sticky inflation than unemployment.
- There is a wide dispersion in the estimates for the neutral rate, indicating a high degree of uncertainty as to where it lies.
- It’s far too early to forecast the impact of tariff policies on inflation and growth.
The market impact.
Today’s meeting was far more hawkish than expected.
- US yields are 10-13 bps higher as traders factor a much slower pace to the cutting cycle.
- The ‘loonie’ (the Northern Peso) is below 70 cents. A weaker currency stimulates exports and puts less pressure on the Bank of Canada to cut. As a result, Canadian rates are 5-10 bps higher.
