The Federal Reserve implemented a 25 basis point cut to the federal funds rate range on Wednesday, though the decision revealed divisions among policymakers. Two members dissented, one advocating for no change and another pushing for a 50 basis point reduction. Chairman Jerome Powell tempered expectations for future cuts, stating that a further rate decrease at the December meeting is far from guaranteed.
Market strategists offered varied interpretations of the Fed’s stance. Morgan Stanley noted that while the committee retains an easing bias, the dissents highlight internal disagreements. Scotiabank suggested the Fed deliberately introduced optionality regarding the December decision, aiming to temper market expectations of an automatic rate cut. PIMCO economists still anticipate a December cut but acknowledge it hinges on upcoming government data indicating further labour market deterioration.
TD Securities believes another rate cut in December remains likely, citing the September projections favouring two additional cuts by year-end. However, they caution that a prolonged government shutdown could affect future inflation releases, potentially leading to a more cautious approach from Fed officials into the new year. Evercore ISI pointed out the Fed’s statement reflects a divergence between growth and labour market assessments, suggesting the Fed remains on track for a December cut despite Powell’s data-dependent stance.
Strategas Securities noted Powell’s comparison of current economic conditions to those of the prior meeting. The key question remains: how low is the Fed funds rate going to go? They believe an about 1 per cent real (inflation-adjusted) rate should be a good long-term target as we move into 2026.
