A cut in December is probably the natural slope, but no done deal

As widely expected, the Fed cut its policy rate by 25 bps. While the economy remains strong – a point Powell made several times during the Q&A – the Fed Chair argued that the labour market has cooled enough to get the point it is “now less tight than just before the pandemic” and “no longer a source of inflationary pressure”. This allows the central bank to remain on a path of gradual restriction removal “towards a more neutral stance”. There was an initial flutter among Fed watchers as the notion that the Federal Open Market Committee (FOMC) has “gained greater confidence that inflation is moving sustainably towards 2%” was removed from the prepared policy statement, but Powell made it clear during the Q&A that reaching such confidence threshold was a “test” to start the restriction removal process back in September. They don’t need to repeat this now the process is ongoing.

None of this was surprising. Hints about the future trajectory, and how the US elections could affect it, were really what journalists were focused on during the Q&A. They did not get much on that front. Powell repeated that the FOMC is not on any pre-set course and will take decisions one meeting at a time. he was also very clear that the Fed would not pre-empt any policy decisions the President or Congress could take: “we don’t guess, we don’t assume”. Of course, Powell stated that when policies are properly laid out, they will be analysed by the Fed staff and will be used as an input on the FOMC’s decision function, among “a million other things” given their impact on the economy, but as long as the timing and substance of these policies are not defined, the Fed will not speculate.

Powell’s explicit refusal to engage in forward guidance extended to the December meeting. He was careful not to rule out anything. He reiterated that, on their general path of restriction removal, they can modulate the pace and “find neutral carefully”. Powell noted that since the September meeting the dataflow on the real economy had been generally stronger than expected, while the inflation print for September was “not terrible, but higher than expected”. He made it plain that the Fed would take a good look at the inflation and employment report prints which will be released by the December meeting. There were several questions on the recent rise in long-term interest rates – presumably to gauge the Fed’s appetite to offset a tightening in overall financing conditions – but Powell insisted that so far this indicated more an upward revision in growth expectations rather than a drift in expected inflation, and that in any case the Fed takes these moves on board only when they are persistent, sending the message that a temporary bump in 10-year yields in the aftermath of the elections would not necessarily spook the FOMC.

Ready for the fight

All in all, we think a 25bps cut in December – our baseline – is still probably the Fed’s “natural slope”, but our level of confidence is lower after this press conference. It would not take much in the next inflation and employment data to put the FOMC on pause. In any case, if the FOMC cuts in December, we expect a pause in January and under our central scenario for the implementation of Trump’s policies, we think the Fed will stop at 4.25% in March. This could of course antagonize the incoming Republican administration, leaving the FOMC open to accusations of partiality after their 50bps cut of September. It seems Jay Powell is readying for the fight though. When asked if he would go if the President asked him to, he simply but forcefully answered “no”. When asked if the President could remove a member of the Fed board, he answered that “it is not permitted under the law”. The test for the future relationship between Trump and Powell may be coming very quickly: we will see if, and how, the President-elect chooses to respond to Powell’s statements.

The market is now pricing Fed Funds at 3.71% for December 2025, still below our baseline, without any major change today between the release of the statement and the end of the Q&A (FX also barely moved while Powell was speaking). Fed Funds pricing is still 6bps higher than before the election results, but given that the market started pricing a Trump victory in earnest since polls began to turn around 20 October, we think that to gauge a “Trump premium” currently at work in the pricing we need to look at the change from 19 October (there was no major data release after that, since the October payroll was too noisy to really affect markets) : Fed Funds pricing for December 2025 moved up by 35bps. We think this is conservative. In any case, the market is in no better position than the Fed: Trump’s platform has the potential to strongly affect inflation and employment in 2025, but as long as we don’t have precise information on the timing and content of the actual decisions, volatility will probably remain elevated.