FOMC: Another risk-management cut, but December looms large

Summary

• As was widely expected, the FOMC lowered the fed funds target range by 25 bps to 3.75%-4.00% at the conclusion of its October meeting. Yet, Chair Powell made clear that additional easing in December was far from assured.
• The post-meeting statement gave a nod to the more limited slate of data the FOMC was able to take into account over the past month due to the government shutdown. The Committee did, however, suggest that its concern about the labor market did not worsen over the inter-meeting period.
• October's policy rate decision was not unanimous. Governor Miran dissented in favor of a steeper 50 bps rate cut while Kansas City Fed President Schmid dissented the opposite direction in favor of holding the fed funds rate steady.
• The divergent dissents are not wholly surprising given elevated inflation and flagging job growth have created some tension between the Committee's price and employment objectives. But with the jobs market outlook not obviously worsening over the past month, inflation still stubbornly above target, and policy now closer to neutral, the bar to another cut in December is higher.
• Our base case remains for the FOMC to reduce the fed funds rate by another 25 bps at its December meeting. That said, with finely balanced risks around the inflation and employment objectives, a deluge of data on the other side of the shutdown could quickly shift the outlook and our expectations for the December meeting. Chair Powell does not think it is a slam dunk decision, and neither do we.
• Notably, the FOMC announced that quantitative tightening would come to an end on December 1. This was one month sooner than our long-standing forecast, although in the grand scheme of the Fed's $6.6 trillion balance sheet, the one-month shortening of the roughly $20 billion monthly runoff will not have a material impact on longer-term yields, in our view.

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