Fin-X Rapid Response December 11th

The U.S. Federal Open Market Committee (FOMC) cut interest rates as expected this morning, and took implementation steps to reduce stress in funding markets. However, there were dissents in different directions on rates. Most on the committee are now expecting to hold rates steady at the next meetings to reassess the outlook.

• The FOMC cut the Fed Funds rate by -0.25% to the 3.50% - 3.75% range, as anticipated.

• There were 3 dissenters. Recent White House appointee Stephen Miran wanted to lower rates by -0.50%. Austan Goolsbee and Jeffrey Schmid preferred no change.

• The updated "dot plots" and other projections showed one more cut is anticipated next year and another in 2027. However, the range of expectations is very wide. Besides the anticipated dovish dots, 4 members see no change, while 3 members expected rates to remain a quarter point higher in 2026.

• In the official forecasts, inflation is expected to decline next year to a slightly lower forecast of +2.5%. But economic growth is expected to be significantly higher at +2.3%, compared to +1.8% in the September forecasts. Unemployment is still expected to be at 4.4%.

  • The official statement began,

    "Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated."

• Following the end of quantitative tightening earlier this month, the implementation note announced that the New York Federal Bank would buy Treasury bills and bonds of less than 3yrs maturity to maintain an ample level of reserves. Maturing bonds on the balance sheet will be reinvested in bills. The change in implementation aims at avoiding stresses in the repo and funding markets.

• Australian unemployment is due later this morning, and expected to tick up to 4.4%.

• S&P500 6,887 +0.7%, Nasdaq Comp. 23,654 +0.3%, S&P/ASX200 future 8,658 +0.9%,

• US 2yr 3.54%  -7bps, US 10yr 4.15% -4bps

• US dollar (DXY) index 98.68 -0.6%, AUDUSD 0.6676 +0.5%, Gold US$/oz 4,227 +0.5%

Fin-X Wealth View

• Recent data suggest that the economy is cooling and the risks are skewed to higher unemployment, despite the stimulus and tighter labour supply. Housing activity is weak, and the JOLTS report this week revealed accelerating layoffs in manufacturing, the two most cyclical parts of the economy.

• Chair Powell confirmed that the risks are skewed to both higher unemployment and higher inflation due to tariffs - a "challenging situation". But the upside risks to inflation had moderated. This was likely the reason that most members preferred the quarter-point cut today.

• However, the Chairman and dot plots hinted that this might be the last Fed cut for some time. That seems reasonable, given next year's fiscal stimulus and gradually declining unemployment projections. There are clearly differing views on the committee and ongoing difficulties related to delayed data. Chair Powell said that the FOMC can "wait and see how the economy evolves".

• We remain sceptical that the fiscal stimulus will be effective. If not for tariffs and tighter labour supply, the Fed would likely be indicating faster cuts. The level of prices and problems associated with affordability are likely to put downward pressure on volumes of sales, which will likely have flow-on effects to slower real growth and higher unemployment.

• Therefore, we expect the Fed will have to cut more than once next year. Indeed, when cutting rates in October, the Fed was then guiding for a hold at today's meeting. That said, if the Supreme Court were to find that the tariffs imposed on countries are unlawful, rate expectations would likely spike higher in the short term.

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