The 50/50 Fed

Sitting on the razors edge for December

On October 29th the Fed lowered the Federal Funds rate 25 basis points to a range of 3.75-4.00%. This was a surprise to no one as the move was well telegraphed and universally expected.

But early in the press conference Jerome Powell threw a curveball that caught the market off guard and setup a 50/50 razors edge for the December meeting.

In describing the general range of viewpoints on the committee about what comes next, Powell said the following:

“In the committee’s discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.”

There are a few things worth noting here in this short statement:

• There were meaningful discussion at the October meeting about what to do in December. That is not a decision for this meeting yet it appears considerable time was spent on it.

• The comments were intense. These were not weakly held views.

• The committee was divided with strong opinions on each side. There was no meeting of the minds.

• Powell put an exclamation on the uncertainty of it with the words “far from it.”

This is not something Powell ever talks about as he always says each meeting is live and nothing has been pre-decided. It appears some committee members may have had discussions at the meeting about December that are going to look pre-decided. He felt the need to address it here because it was quite divided and disagreeable. Powell also recognized this would become clear soon enough as he said you will see it in the meeting minutes when they are released in three weeks anyway.

Powell also wants to prepare the market for an outcome they may have discounted to prevent a possible future whipsaw reaction when the meeting minutes are released. He is sending a stark message to the bond traders that the market is overconfident about a third cut. Bonds sold off immediately and took interest rates 6-8 basis points higher in a matter of minutes. The market odds of a third cut also dropped meaningfully from around 90% to somewhere in the mid 60s% range.

We can actually look at the past couple months and see the seeds of this battle setting up:

1. Fed Governor Stephen Miran gets appointed just before the September meeting and immediately begins to prod the committee towards more aggressive easing. The committee closes ranks and shows ultimate unity in September for a modest cut against his efforts.

2. At this October meeting we got the obligatory Governor Miran cattle prod dissent once again wanting a 50 basis point rate cut just like the last meeting. However we also got another dissent from the other side of the ledger. Fed President Jeffrey Schmid dissented in favor of no rate reduction. The unity is now dissolving as people begin to stake out opposing positions.

3. If we go back to the dot plot from the September meeting it showed expectations for 3 cuts in the final 3 meetings of 2025 but only by the slimmest of margins. The dot plot showed that 9 members expect no more than 2 cuts with 7 of them expecting no more than 1 cut. 9 members expected exactly 3 cuts, and one member (Miran) expected way more than 3 cuts (6 cuts). So the balance of that is that 10 members expected at least 3 cuts and 9 expected less than 3. This is a very closely divided outlook on the third cut. Using the 10/9 split to say the committee expects 3 cuts doesn’t accurately reflect the uncertainty of that third cut.

This is the third time I have posted this consequential dot plot.

The lack of data due to the government shutdown could also be a factor. Powell was asked about the impact of that and he said, “If you asked me could it affect ... the December meeting, I’m not saying it’s going to, but yeah, you could imagine that. You know, what do you do if you’re driving in the fog? You slow down.”

So today we sit with a 50/50 Fed on how to move forward in an environment with conflicting Fed mandate goals that cannot both be met at the same time. The Fed has not faced a conflicting mandate since 1980. The battle is heating up for December and some committee members were apparently already putting on their armor in the October meeting.

The market still thinks the odds favor a cut, but Powell is warning them that it is very uncertain. Every Fed member who speaks between now and December will be listened to very carefully.

The Fed really needs some new data. It is unclear who has the upper hand in this battle on the committee. The Fed’s December rate decision likely breaks whichever way the data does.