October FOMC recap—fog in the forecast

For the second consecutive meeting, the Federal Open Market Committee (FOMC) lowered the target range for the fed funds rate by 25 basis points (bps), bringing the target range to 3.75% to 4.00%. Though the move was well telegraphed, the hawkish tone of the subsequent press conference left markets on the back foot, with the clear takeaway that a December rate cut should no longer be viewed as a “foregone conclusion,” and that policy is “not on a preset course.”

The committee’s prepared statement opened with a reference to “available indicators,” an acknowledgment that the ongoing government shutdown has constrained access to key inflation and labor market data. Despite this lack of comprehensive information, the statement modestly upgraded the committee’s assessment of economic activity and noted that inflation has “moved up since earlier in the year and remains somewhat elevated.” On the labor market, the previous characterization of growing downside risks was mostly retained.

Recent signs of stress in funding markets had led many to expect that the Federal Reserve (Fed) would announce an end to its balance sheet runoff at this meeting, and the committee delivered on that. Beginning December 1, the Fed will reinvest principal payments from its Treasury holdings into Treasuries across the maturity spectrum. In addition, principal payments from the Fed’s holdings of agency debt and agency mortgage-backed securities will be redirected into Treasury bills. Fed Chair Jerome Powell described these actions as consistent with the view that bank reserves have shifted from “abundant” to merely “ample,” and that, over time, this will inch the Fed toward an all-Treasury balance sheet more closely aligned with the “outstanding stock of Treasury securities.”

Finally, the statement noted two dissents. Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City and a well-known hawk, voted to keep the policy rate unchanged, while Fed Board Governor Stephen Miran dissented in favor of a 50-bp rate cut for the second consecutive meeting.

In the press conference, Powell reiterated the tension between still-above-target inflation and a “cooling” but not collapsing labor market. While the consensus was broadly in favor of today’s cut, opinions regarding the appropriate action for December were described as highly “disparate” with “a growing chorus” of members now feeling like it might be appropriate to pause and assess conditions. The lack of official data evoked the familiar metaphor of “driving in the fog” despite Powell referring to the data dearth as “a temporary state of affairs.”

Today’s policy action lowers the target range for fed funds to a level 150 bps below the cycle peak. While the cumulative easing is substantial, the precise distance from the neutral rate remains a matter of debate within the FOMC. Following today’s decision, the fed funds rate now enters the range of longer-run projections outlined in the most recent Summary of Economic Projections, suggesting that some committee members may already view policy as near neutral or even mildly accommodative.

Estimating the neutral rate with precision in real time is widely regarded as an inherently uncertain exercise. That said, indicators such as rising housing market stress, slower job creation and softening wage growth could support the view that monetary policy remains restrictive. Conversely, those who disagree often point to still-elevated inflation, robust capital spending and record equity prices as evidence that policy may, in fact, still be too loose. Today’s “hawkish cut” is the likely compromise until we receive more economic data.

In our view, the Fed (in a close decision) will deliver another 25-bp cut in December, consistent with the path outlined in its prior projections. But easing further in 2026 will require a more material deterioration in labor market conditions, most clearly evidenced by a continued rise in the unemployment rate.