Energy News Beat
Energetic backpedal from the aggressive monster-rate-cut trajectory envisioned by the markets three months ago.
By Wolf Richter for WOLF STREET.
The FOMC voted today to cut the Fed’s five policy rates by 25 basis points, with 1 participant dissenting, (Cleveland Fed president Beth Hammack who preferred no cut).
And participants see only two cuts in 2025, after economic growth, labor market growth, consumer income and spending, the acceleration of inflation, and big up-revisions of the data this fall have changed the scenario from that infamous soft landing to cruising at a fairly high altitude at an above average speed.
The FOMC also lowered by an additional 5 basis points the offering rate of its Overnight Reverse Repos (ON RRPs), which takes the offering rate to the bottom of the range of its rates (4.25%). The minutes of its last meeting disclosed discussions to that effect. We’ll mull this over in a separate article later, but briefly:
This adjustment will encourage money market funds that use ON RRPs to find other places for their cash, such as the repo market, which would ultimately drain ON RRPs faster to near-zero and shift liquidity to reserves, so that the Fed can continue QT for longer before reserves drop to the “ample” level at which the Fed has said it would end QT.
The 25-basis-point cut reduced the Fed’s five policy rates to:
- Target range for the federal funds rate to 4.25% – 4.50%.
- Interest it pays the banks on reserves: 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 4.25%
- Interest it charges on overnight Repos: 4.50%.
- Primary credit rate: 4.50% (banks’ costs of borrowing at the “Discount Window”).
QT continues at the pace announced in May. The Fed has already shed $2.1 trillion in assets since it started QT in July 2022. According to the FOMC’s Implementation Notes today, the Fed will continue to shed Treasury securities and MBS under the current caps.
The “dot plot.”
Today’s meeting was one of the four times per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plots.” The prior SEP came out with the monster-cut meeting in September.
For the SEP, each of the 19 participants jots down where they see the Fed’s policy rates, unemployment rates, GDP growth, and PCE inflation by the end of the current year and by the end of each of the next several years. The median value of these projections becomes the headline “median projection” for that metric. These projections are neither a decision nor a commitment by the Fed. Members change their projections as the economic situation changes.
Interest rates: only 2 cuts in 2025. Today’s cut reduced the midpoint of the target range for the federal funds rate to 4.375%.
Today’s median projection for the end of 2025 rose by 50 basis points from three months ago, to 3.875%, so only 2 cuts of 25 basis points each in 2025, compared to the 4 cuts they had envision for 2025 in the September SEP, reflecting the Fed’s backpedal from the aggressive monster-rate-cut trajectory envisioned and hoped-for by the markets three months ago.
Projections by the 19 FOMC members for the midpoints of the federal funds rate by the end of 2025 (bold = median):
1 sees 4.375%: No cuts3 see 4.125%: 1 cut of 25 basis points10 see 3.875%: 2 cuts of 25 basis points3 see 3.625%: 3 cuts of 25 basis points1 sees 3.375%: 4 cuts of 25 basis points1 sees 3.125%: 5 cuts of 25 basis points.
The “longer-run” federal funds rate keeps rising. The median projection for the “longer-run” federal funds rate beyond 2027 rose to 3.0%, up from 2.9% at the September meeting, up from 2.8% at the June meeting, and up from 2.6% at the March meeting.
At the same time, it sees PCE inflation at 2.0% beyond 2027. In other words, over the longer term, it sees its interest rates to be 1 percentage point higher than PCE inflation.
GDP growth: The median projection for real GDP growth for 2024 rose to 2.5% (from 2.0% in the September SEP). For 2025, the GDP growth projection rose to 2.1% (from 2.0%), and 2026 remained at 2.0% (which is the 15-year average real GDP growth of the US).
Unemployment rate: The median projection for the unemployment rate declined to 4.2% by the end of 2024 (from 4.4%). For 2025, the median projection declined to 4.3% (from 4.4%).
Inflation rate: The median projection for “core PCE” inflation by the end of 2024 rose to 2.8% (from 2.6%). For the end of 2025, it rose to 2.5% (from 2.2%).
Overall PCE inflation is seen rising to 2.5% in 2025, higher than it is now (2.3% in October). No 2.0% in sight until 2027.
What changed in the FOMC’s statement:
The statement changed in only in two ways in the third paragraph, and the rest was unchanged.
Replaced the old rate with the new rate: “…to 4-1/4 to 4-1/2 percent.”
New: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate,” which replaced the old: “In considering additional adjustments to the target range for the federal funds rate…”
The whole statement:
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.
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The post Fed Cuts by 25 Basis Points, to 4.25%-4.50%, Sees Only 2 Cuts in 2025, Sees Higher Inflation, Higher “Longer-Run” Rates. QT Continues appeared first on Energy News Beat.
