The FOMC cut the Fed Funds rate by 0.25% (25 bps) earlier this afternoon, bringing the target overnight rate down to 3.5% to 3.75% in a split decision with three members dissenting.
- This decision marked the first time since 2019 that three officials voted against the policy decision, with dissents on both ends of the policy spectrum, and the committee also authorized fresh purchases of short-term securities.
- Two regional Fed Presidents – Austan Goolsbee from Chicago and Jeff Schmid from Kansas City voted against the decision, preferring to keep rates unchanged. Stephen Miran, appointed to the committee in September, dissented gain (he had in November too), in favor of a larger, half-point reduction.
- Speaking to reporters after the meeting, Chair Powell suggested the Fed had now done enough to bolster employment – the key driver behind the rate cut, while leaving rates high enough to weigh in on price increases.
- Clearly, there are differences of opinion within the FOMC. The following statement by Powell addresses this point:
“Interestingly, everyone around the table at the FOMC agrees that inflation is too high, and we want it to come down and agrees that the labor market has softened and that there is further risk. Everyone agrees on that. Where the difference is, is how do you weigh those risks and what does your forecast look like”.
Our Take:
- Persistent inflation near 3% (the Fed’s target is 2%) is an ongoing concern. Expect the threshold of labor market weakness to increase to trigger the FOMC to cut rates further. We believe the Fed is raising the bar for future rate cuts.
- With respect to (1) above, the Fed Funds futures markets are not pricing a large likelihood of a further rate cut until about June/July of next year.
What this means for investment portfolios?
- Cash and short-term bond investments are getting progressively less attractive as yields are now barely covering inflation. Long term rates (10 years and out) have actually increased over the past month suggesting inflation concerns persist.
- Risk assets may get a short-term boost since the cost of financing them for levered investors will come down. However, rich valuations may temper that type of behavior.
- As always, maintain reasonable levels of diversification in investment portfolios.
In short, today’s move from the Fed delivers a modest dose of relief while also signaling that policymakers aren’t eager to rush into additional cuts. With inflation still hovering stubbornly above target and committee members split on the best path forward, investors should expect a more measured, data-dependent Fed in the months ahead. For portfolios, this environment reinforces the value of staying balanced, avoiding overreliance on cash or short-term yields, and keeping a long-term focus as markets digest both the policy shift and the uncertainty that surrounds it.
