FOMC Watch: December is far from a foregone conclusion – ABN AMRO

The FOMC lowered its policy rate by 25 bps to the 3.75-4.00% range. There were two dissents, with Miran favouring a half-point cut, and Schmid favoring no cut. The Schmid dissent came as a surprise, and likely reflects wider disagreement and uncertainty going forward. Powell explicitly confirmed this, highlighting substantial difference of opinion and noting that December is 'far from' a foregone conclusion. Apart from that, the monetary policy statement maintains the description of the labor market, noting that recent indicators are consistent with earlier developments. Powell's rationalization for today's cut was therefore identical to last time; risks to the two sides of the mandate have become more balanced and the policy rate was moved closer to neutral, ABN AMRO's Senior Economist Rogier Quaedvlieg reports.

Labour market gradually cooling, no major shifts in outlook

"We were looking out for two things. Details about a possible end to QT, and any shifts in the Fed's outlook in the absence of government data. Regarding the first, the Fed indeed announced the end of QT, and that it will stop shrinking the balance sheet as of December 1st. It will roll maturing agency debt over into Treasury bills. Reserves had fallen to about the 'ample liquidity' level in recent months. The size of the balance sheet will be frozen at that level, but will be allowed to grow at some later point to keep ample liquidity as non-reserves grow."

"Regarding the outlook, Powel's assessment is that available data suggests the outlook hasn't changed much. The labour market appears to still be gradually cooling, and in a low-hire, low-fire mode. The latest CPI report confirms that goods inflation is elevated from tariffs, housing services is gradually cooling, and overall services inflation is pretty much sideways. He even noted that in the absence of tariffs, PCE inflation would be around 2.3-2.4%. They are monitoring, but are still not seeing effects that worry them about second round effects. He expects an additional 0.3-0.4pp of inflation coming from tariffs."

"With the government shutdown likely continuing for a while, FOMC members probably won't have October inflation or labour market data by the next meeting on December 10th. Powell noted they'll be able to paint a picture with the data that they do have, emphasizing the Fed's Beige Book multiple times, whilst missing the usual detailed feel of things. They do believe they'd be able to pick up a turn of the economy. One could argue both ways, but Powell noted that uncertainty might prevent them from making a move in December, noting that 'if you're driving in the fog you slow down.' For now our remains another 25 bps cut in December, and a further 75 bps throughout 2026, while continuing to see the risks to the Fed path to the upside."