SPECIAL REPORT: Reaction To Today's Federal Reserve Rate Cut Decision | Axel Merk

My notes on today' news + a live discussion (with audience Q&A) at 5pmET

An hour ago, the Federal Reserve Open Market Committee released the outcome of its meeting this week, cutting its benchmark interest rate by 0.25% as expected.

Its “dot plot” somewhat surprised, showing that the pace of future rate cuts is expected to be slower than the market was expecting:

And just a few minutes ago, Fed Chair Jerome Powell just wrapped up his press conference related to this release — and the market did NOT like what it heard.

The S&P (so far) has fallen over 2.5%.

My bullet-point notes to Powell’s conference are below.

And I’m also happy to announce that Fed-watcher Axel Merk is joining us again to deliver his expert reaction to the Fed’s latest guidance as well as take your questions live.

This live event with Axel will take place today at 5pmET/2pmPT and can be accessed via this link or by clicking on the image below:

If you missed the event while it was happening, clicking on the above link/image should take you to a replay.

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Here are the key points I captured from Jerome Powell’s press conference:

POWELL’S PREPARED REMARKS

• The Fed remains squarely focused on dual its mandate

• The economy is "strong" & has made good progress towards our goals

• The jobs market has cooled, but still remains "solid"

• Inflation continues to move towards our 2% target

• The FOMC lowered policy interest rate by 25bps, down 100bps from peak

• QT continuing

• Recent indicators suggest the economy is expanding at a solid pace: GDP rose at 2.8% in Q3, the same rate as Q2

• Growth in consumer spending ahs remained resilient and investment in equipment and intangibles has strengthened

• In contrast, housing sector is weak.

• Expects GDP to remain a solid 2% over the next few years

• The unemployment rate has risen, but still "low"

• Wages inflation has eased and jobs are more in balance. The labor market is not a source of inflationary pressure. The median unemployment rate is projected to be 4.2% by the end of 2024 and 4.3% over the next few years.

• Inflation has eased significantly but remains somewhat elevated compared to our 2% goal. Some key measures are rising.

• Surveys show inflation expectations are generally well-anchored. Total PCE is expected to be 2.4% in 2024 and 2.5% in 2025, higher than expected in Sep. After that is should fall to our 2% objective.

• Sees dual mandate priorities as "in balance"

• Given our 100bps of cuts so far, we can be more cautious to further reducing our policy rate going forward

• We're not on any pre-set course. We'll be data dependent.

• 3.9% is median expected CPI at 2025 end and 3.4% at end of 2026. These are higher than before.

• We can react quickly to what future data tells us

• We lowered offering rate on RRP, but this is a technical move, don't take this as a change in monetary policy

• We care about all Americans and everything we do is for their benefit

MEDIA Q&A

• NYT: Why cut rates at all in 2025 if inflation is expected to remain firm? Do you plan to cut or pause in Jan?

  • This was a closer call to cut this time

  • Downside risks to the labor market have diminished, though it's still cooling in an orderly way.

  • We see inflation as broadly on track. Housing services inflation is finally heading in the direction we want.

  • We feel that slowing the pace of future adjustments seems prudent now, especially as we expect inflation to be sticker than we initially thought. We'll get inflation down to 2% though. We're significantly closer to neutral than we've been.

  • We'll cut again when inflation keeps coming down to merit it

• Reuters: How much of the slow cut decision is due to current inflation vs expectation of inflationary fiscal policy next year?

  • Economy grew more strongly in 2024 than we expected

  • Unemployment is low

  • Inflation is sticky & uncertainty around it is higher than before

  • Some FOMC members did cite future inflationary fiscal policy as a concern

  • These all suggest we should start being more cautious

• AP: Thoughts on potential upcoming tariffs?

  • We're going to wait and see what happens and not worry beforehand

  • Our past simulations suggest they may not be that inflationary

  • It's premature to make any decisions now based on what may happen

• WSJ (Nick Timiraos): If inflation declines from 2.8-2.9%% to 2.5-2.7% next year, what would compel the FOMC to cut? Should we infer that today's rate cut is going to be the last one for a while?

  • We'd cheer a decline to 2.5%

  • Not willing to say we're done cutting in the near term. We'll let the data tell us what to do. Things are uncertain.

• Bloomberg: No downward movement in mortgages, auto loans, credit card rates after 100bps of Fed cuts. Why?

  • The Fed doesn't control longer rates like those

  • Most forecasters keep calling for a slowdown in economic growth, but we haven't seen it yet, and don't see one happening soon. US economy is doing great -- outlook looks bright

  • I'm confident inflation has come a good deal so far, and will hit our target given enough time. Housing inflation starting to come down. Labor market is cooling. The inflationary impulses that spiked CPI are unwinding.

  • Insurance is pushing inflation higher, but that's a lagging effect.

• FT: Unemployment rate, while low, is near where it was in July, when the Fed became a little concerned (triggering a Sahm Rule). Is the Fed just not as concerned this time?

  • Yes, while the labor market is still cooling, it looks normal to us

  • We don't need further softening in the labor market to get to 2% inflation.

• CNBC (Steve Liesman): Is the re-calibration phase over? How much are recent events (hurricanes, avian flu) factoring into your analysis?

  • We are in a new phase of the process given that we've reduced our policy rate so much. We are still restrictive, but we're much closer to neutral. Now it's time to wait for inflation to keep making progress towards our target.

  • We try to look at smoothed data vs spiky events

• Axios: Are you worried about loose financial conditions? The markets have been on fire.

  • We're not too worried -- both inflation and labor have cooled, so our policy is working. Clearly financial conditions aren't impeding us.

  • When asked about Bitcoin reserve: the Fed is not looking for a law change to enable it to own Bitcoin

• Are you satisfied with how the economy performed in 2024? Is there more downside risk in the labor market than the unemployment rate suggests?

  • Yes. No recession and growing solidly. The US economy has been "remarkable"

  • I feel very good and want to keep it going

  • Not worried about the labor market. Hiring rate is low, which we're watching closely. But other factors (participation, wages, unemployment) are pretty strong. We don't need to see further softening to get inflation under control, but it would help.

• Reuters: Do you see the labor market as needing more support given its cooling?

  • No -- we see no real signs of reasons to worry

• ABC News: High prices are a big burden for households. Why is it proving to be more stubborn than expected?

  • It's only a "little" more stubborn than we expected. We've managed to bring inflation down a lot without a recession/etc. We feel good about that.

  • It hasn't hit our goal yet due to how we calculate housing services and a few other factors.

  • What people are feeling right now are "high prices" not "high inflation". The global inflation COVID create has created a lot of pain.

  • Our job is to hold inflation low while real wage gain help people earn at a faster rate than future inflation

• Fox Business: Where do you think the neutral rate is?

  • We don't know, but we'll "know it by its works" (i.e. when we see it). I can tell you we're 100bps closer to it than we were

  • When pressed that the markets want more clarity on this, Powell more or less said 'get used to uncertainty'. This is why we're getting more cautious about the pace of rate cuts.

• Politico: Does progress in core PCE count as progress for inflation even if headline CPI ticks up?

  • Overall goal is to get headline PCI down to 2%. But we look mostly at Core inflation b/c it better measures the things we can control.

  • Headline is impacted by energy & food which are much more volatile

  • We monitor geopolitical risks carefully, but we don't see much to make us change our current estimates

• CBS News: Will wage growth really outpace inflation in 2025?

  • More or less "I hope so"

  • Admitting that Fed is progressing towards its 2% target slower than it wanted to

• Marketplace: Is the Fed considering raising its target to 2.5%? Will the Fed rule out a rate hike next year?

  • No, we're not going to settle for anything higher than 2% and we're very confident we'll achieve it in time

  • Highly unlikely (though not impossible) that the Fed will hike in 2025

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Let me know in the Comments below if you appreciate special opportunities like this, reacting to breaking developments.

I’m constantly thinking of ways to increase the value I can deliver to my Substack audience.

Hope to see you at the live Q&A!

cheers,

Adam

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