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By: Kathryn Rooney Vera, Managing Director and Chief Market Strategist
From the desk of our senior advisor, Jon Hilsenrath.
Two-more-cuts, the Baseline for 2025: The Fed’s interest rate projections for 2025 show that officials anticipate two more quarter-point rate cuts in 2025, but by the narrowest possible margin. Ten officials wrote down two more cuts or more for 2025, while nine officials wrote down one more cut or less, with seven of those latter nine in the “no more cuts” camp. If you take out President Trump’s new governor, Stephen Miran, the old guard at the Fed was evenly split on the rate outlook.
One must presume that Powell was in the majority, so his baseline is two more cuts for the year.
However, in an important exchange in his press conference with CNBC correspondent Steve Liesman, Powell encouraged people to think about the Fed’s rate projections, i.e. its “Dot Plot,” in probabilistic terms, not as a binary decision. In other words, this was not a case of two versus three. It was a case of what is the probability of two or three. His observation suggests he’s not sold on two more cuts; he sees the probability as a little over 50%, or 52.6% to be more precise.
As always, Powell noted, it will depend on the data.
Scenarios: Using Powell’s observation that the dot plot can be considered in probabilistic terms, here are possible scenarios for rates though year-end, with subjective probabilities attached with the distribution of dots as a rough guide:
Taking this a step further, in 75% of these cases, there is another rate cut at the next meeting in October.
Faster Path to Neutral: While the Fed added a rate cut to 2025, by the slimmest of margins, officials did not show a desire to accelerate its plan for cutting rates in 2026. In June officials projected one rate cut in 2026 and again at this meeting they projected one rate cut next year. In all, the projected rate by the end of next year is only a quarter-point lower than previously planned. In the central bank’s mind, under current management, it is taking a slightly faster path to neutral than planned, but this is not a regime change in thinking about where rates ought to be or the pace of getting there. The Powell Fed is still in a cautious go-slow mode. That might change with new leadership, but it has not changed yet.
What Powell Revealed: The Fed chairman is more worried about weakening in the labor market than the persistence of inflation. He sees the balance of risks as having shifted in the Fed’s efforts to manage employment and inflation tradeoffs. Cutting rates now is an exercise in part at risk management, to avoid further labor market weakening. It’s not a regime change in thinking about the appropriate level of rates. It is striking, however, that Powell appears highly sensitive to signs of a weakening labor market. To put this in bird terms, he is leaning somewhat dovish. Having done a lot of hard work stabilizing inflation, it appears that he does not want to leave after eight years leading the central bank with a job market downturn on his hands.
What Was Surprising? The Fed’s economic projections for 2026 look a bit rose-colored. Officials see growth in GDP accelerating a bit next year, the jobless rate coming down a bit and inflation decelerating. One would not think inflation would recede while growth accelerates and labor slack diminishes. One can only make sense of the projection under two scenarios: 1) Productivity growth is expected to rise; 2) Officials are counting on tariffs to pass as a one-time price shock with no lasting effects on growth, hiring or inflation, i.e. they’ll prove transitory.
Powell has made clear that he does indeed see tariffs as a one-time event. The view that warrants some skepticism: Globalization and low tariffs coincided with more than a quarter century of U.S. goods price deflation, a point Powell acknowledged in the press conference. Reversing that process could have long-lasting effects, i.e. a whole new tariff regime could cause persistent pressure on goods prices, at least the end of goods deflation. The Fed could find it hard to achieve the numbers it has laid out for next year.
Trumpification of the Fed Takes the Backburner: Fed Governor Lisa Cook was cleared by courts to participate at the meeting. She voted with the majority. Two Trump first-term appointees, Waller and Bowman, voted with the Powell majority.
Stephen Miran, the president’s newest appointee, looked like an outlier. He was the lone dissenter, calling for a half percentage point rate cut. Powell dismissed the idea as not taken seriously at the meeting. In addition, the lone projection of a sub-3% fed funds rate by the end of 2025 was also likely written down by Miran. It was far outside of the mainstream of the central bank. No other Fed official was within 0.75 percentage points of that call.
A few weeks ago, Washington was buzzing with the (improbable) idea of a Trump takeover of the central bank. If Cook keeps her seat at the Fed as she did today and if Waller and Bowman remain independent-minded and near the broad consensus as they did yesterday, then a dramatic remake of the central bank is even more unlikely.
-- Author: John Hilsenrath, Senior Advisor
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