Fed Announces Third Consecutive Rate Cut, But Expectations Have Changed

The Fed announced a 25 basis point rate cut today. This rate cut marks the third consecutive rate cut and brings the target rate to 4.25%-4.50%. In his remarks, Fed Chairman Powell said that "today was a closer call, but we decided it was the right call," setting the tone for monetary policy in 2025. The announcement and subsequent comments sent the equity markets to react (and perhaps overreact) pessimistically. The Fed said it would consider "extent and timing" of future adjustments citing "higher inflation readings" as the primary reason for the uncertainty.

The Fed has taken a relatively cautious stance in their comments, despite the 100 basis points of rate cuts we have seen in the last 90 days. The equity markets have whistled past many of these comments, declaring the elusive "soft landing" has already taken place. They point to, among many other things, the US economy growing at 3.2%. However, for the Fed, their dual mandate has always been clear, target inflation of 2.0% and we are just not there yet (2.7% in November).

At the very least, expectations have certainly been reset today. The probability that we see a rate cut at the next Fed meeting in late January is low (CME Group currently has the likelihood of a 25 basis point cut at 8.6%). On the surface, that should not cause great concern, but there are many unknowns in the interim (most notably surrounding inflation) that could escalate volatility. The equity markets have been riding a secular bull market for the last 18-24 months and they will likely brush most of this announcement off and show green tomorrow. The question has been how quickly can we get to a terminal rate of 3.50% (or close to it)? After a period (albeit brief) of a certain path, that answer may have just changed.