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The most divided FED since before the pandemic voted to lower the benchmark rate by twenty five basis points, as investors expected, but there were three descents for the first time since twenty nineteen, and on the dot plot, a total of six members of the committee suggested they were
not in favor of lowering rates. There's also a hawkish line in the statement in considering the extent and timing of additional adjustments to the target range, bringing back language from a year ago when they paused their first round of rate cuts. No surprise, Stephen Myron wanted a half point reduction, but in something of a surprise, Austin Gouldsby joined Jeffrey Schmid in dissenting for no cut at all.
Dot plot suggests just one cut coming. Seven members want no move, however, including three who think the rate might go up. The committee statement says economic activity has been expanding at a moderate pace and the latest forecasts show a consensus GDP figure of one point seven percent for this year, but in a big move up. They have revised growth forecasts for twenty twenty six to two point
three percent. Unemployment forecasts to finish this year at four and a half percent will fall back to four point four percent next year. Using identical language from October, the statement says job gains have slowed this year and the unemployment rate has edged up through September. Nodding to the government's shutdown caused absence of data, the statement repeats that more recent indicators are consistent with these developments. There's no
change in the inflation assessment. It has moved up since earlier in the year and remains somewhat elevated. However, it is seen slowing market next year. PCE headline from two point nine percent this year to two point four percent in twenty twenty six, and as always, they won't reach their two percent target for two more years. In twenty twenty eight, core PCE will finish the year at three percent,
falling to two and a half percent next year. As for the balance sheet, the statement now says reserve balances have declined to ample levels. The Fed will buy shorter term treasuries, mostly bills, but up to three year notes as needed to maintain that ample supply. The first operation will be announced tomorrow, with the first purchases on a Friday of approximately forty billion dollars in treasury bills.
Guys, Michael McKee, stay close as we parse through this. Right now, what you see in markets is a collective cheer. Perhaps this was supposed to be a hawkish cut. The market is taking it slightly differently, as MPPI had been lower. Now it is positive by almost two tounts of percent.
Euro dollar euro climbing dollar falling on the heels of what does seem to be like more FED cuts, and across the board tuesd tens, and thirties, you are seeing a bid into bonds with this feeling that this is a FED that not only is going to support rates with further rate cuts, but also with additional bond purchases time.
To me, the most interesting nuance here is the descent of the gentleman from Chicago. This is brilliant academics out of Milton Yale and the Massachusetts Institute of Technology. Austin Goulesby is basically our technology president. He's wired into the Internet, wired into the computers and I'd love to know if his descent has to do with the vibrancy of AI which leads to a better productivity, a better GDP. Let's be careful what we do.
Yeah, right now we're looking at nine votes, four and three descents. Bob Michael of JP Morgan with us here, what's your first reaction of this decision?
Not as bad as it could have been. There could have been a lot more descents in favor of rate cuts. When we look at things like PCE. We expected they would lower core PCE by a tenth. They did that. They left the unemployment rate for next year roughly where it was last year. They did raise their expectation of
GDP a couple of tenths from where it was. So to me, that seems to be, if you want to call it, a hawkish tilt, the one hawkish tilt, and of course, adding the extent and timing of additional adjustments to rate policy going forward, that was pretty much in the market. So I think, mostly as the market expect and nowhere near as bad as the market feared.
So not maybe as hawkish of a cut as people thought it might have been. Joining us now, as Jim Bianco of Bianco Research. Jim, what's your first reaction to this decision, which, as Bob was saying, isn't as bad as it could have been. It could have been four decents or five descents, only three decents. Is this a victory for Jerome Powell.
It's a victory for Jerome. But I'll take the other side, Bob. I'll say that it's not as good as it could have been. I was hoping for a seven to five vote. I was hoping for FED that was more divided, that was more independent, that was going to send a message to the administration. You could put a guy in that wants to go to one percent, but he's not going to bully us to cut rates next year just because he's the FED chairman. They kind of left the door open.
I think that the FED can be bullied by the next FED chairman to do the bidding of President Trump.
Bobby, you were saying that you wanted to respond, not as good as it could have been with more descents.
I think if you're the administration and you're invested in this market, this is pretty much as good as it could have been. Other than no descents, I'm not sure how additional descents make this better?
Well, McKey descent at the press conference.
Well, let's find out, Mike, you were parsing through this, you've got something to add? What do you see?
Yeah, Well, the point I'd like to make is that the SEP shows that growth is going to pick up significantly next year, unemployment is going to go down, and inflation is going to go down significantly next year. So what was the rush to cut rates today if they think that's the track that we're on. I think that's going to be a key question for JPOW in the news conference. Does this raise the possibility that they could
be going the wrong direction with rates? There were some people who made that case before we went into today's meeting, and they're going to be still raising questions about it going forward.
Michael McKee, thank you so much. We will be catching up with you and of course listening to your questions. Jim, this is something that is near and dear to your heart, as you call yourself a self dove inflationista, do you think that this really adds to that inflationary pressure if the FED essentially is accepting that they're not going to get down to their inflation target for six seven potentially even eight years.
I agree. I think that the FED has to be very worried about that. We're worried about affordability right now. The CPI is up twenty seven percent since the end of COVID, and that's what people are upset about. How do we fix that. We need the inflation rate to run below two percent for a while so that wages can catch up. If the inflation rate is going to at three and moderate to two and a half, that is going to keep the affordability anger white hot over the next year to year and a half or so.
And so I don't think that accommodating that by cutting interest rates is going to help. And that's the question I hope the chairman gets is, how are you helping affordability with one hundred and seventy five bases points of cuts in the last fourteen months.
Jim, We've got to review the past. Here you were a leader on saying that inflation would be sticky. It was a lonely call years and years ago, and Bianco of Chicago said, you know what, folks were not falling down to two percent. So here we are, Jim Bianco, I just want to know the efficacy Jim Bianco where he says in the press conference, basically, one and done. We made a rate cut. Maybe we will have a sequence of future rate cuts, but we really really now
have to wait and see what the data says. Isn't that where we are Jim Bianco, Well, that's if that's what he says.
And again, what I was trying to say before is if the chairman imitates that it's one and done, he's a chairman's running the show. And in May we're going to have a handpicked successor from Donald Trump running the show. And we know what Trump thinks about it illustrates and that person's going to want to have lower rates. But if he does say that, then maybe the market will take it a little bit differently. And we'll see if
he does. But most of the times he'll just say he's going to be data dependent, and it depends on what the data is.
This is an important ving at folks that I think just so valuable. I'm in a room with Axel Weber, Sharkawa of Japan, the wonderful John Lipski with all of his work on New York Wall Street, many other worries. Tomahonig was there from Kansas City and the room fell silent, Bob Michael when they talked about the next regime of the FED and the risk here that it would be
cut cut, cut cut. Is that a legitimate fear that the next chairman and the apparatus will allow us to go towards some regime of new lo low rates.
Well, I think you have to look at which FED presidents are coming onto the FOMC next year, and they're mostly in the hawkish cap. So whoever you put in as the FED chair has to be very persuasive. And I guarantee you the President isn't looking to appoint the next Paul Vulker. They're looking to appoint someone who believes in supply side economic.
And Lisa, this is critical, This is absolutely critical. That we have an analog here with the Bank of England that over time has told the Governor of the Bank of Inland and their chairman equivalent, no, we're not in agreement, We're not going to do it. Is that what our twenty twenty seven looks like.
Part of the problem is people get overwhelmed by the state of events, and this is something that you talk about a lot, and Jim, I'd love your thoughts on that this idea, that this is a FED that is now buying bonds once more, buying notes once more, and they're doing so because of reserves issues and really technical
considerations for the market. They don't want another repo freak out at this point, though, it does indicate a structural issue with how much debt is out there, the government deficit that's not going down, and a question of the Fed's role. Are they being forced to monetize the debt in a way that will keep them artificially easy if you're just going off the economic outlook, I.
Think they are at least being force to acknowledge fiscal dominance, that the fiscal situation is important. Basically, the funding market, the repo market, which funds the thirty eight trillion dollar treasury market, is too small. It's too small because the Fed has been doing QTE and reducing reserves. Those interest rates report rates have been going up. Now. One answer could be to tell Congress you can't spend as much money, you can't run as big a deficit because the funding
markets can't handle that size of a market. But if the FED wants to elect to, let's expand the funding markets to meet the size of the bond market. You're telling Congress, go ahead, spend more money, run bigger deficits. We've got your back. We'll continue to expand that funding market to meet those goals. And the biggest driver of inflation will over the last couple of years, other than the supply shock that we had in twenty one, has
been government spending. And they seem to be encouraging more government spending.
Bob, do you agree with that, absolutely, one hundred percent. But it doesn't change the fact that that's what's occurring and the markets responding to that. I look at everything that just happened in the last few minutes, and you know, everyone got what they wanted. Those hawks on the Fed that didn't want to see a rate cut, they got that. When you look at the Fed futures market, we had two rate cuts priced for next year, midyear, and the end of the year. Now there's only one price for
next year and it's in the fourth quarter. So you got what you wanted. You got the market moving away from being in a rate cutting regime going forward. But if you look at the doves on the Fed, if you think about the administration, they got what they wanted. They got another twenty five basis point take and off of base rates, and the markets responding positively to that. It's rare that everyone gets what they wanted out of an FOMC meeting.
Jim, I love your comments on that, this idea that everyone wins. If you do have monetization of the debt, yes, you do have ongoing fiscal spending, yes, but that helps support the markets. And we're not seeing runaway inflation, so what's the problem.
We're going to get a new FED chairman, that's the big issue. And the new FED chairman is going to be perceived to be having a political agenda, and you were hoping that the current members of the FOMC were going to act as an independent break on a political agenda that was coming in. And that's why I wanted to see more dissents to be signal that they were ready,
willing and able to be that political break. Now maybe they will once we get that new FED chairman, but then that looks political that they didn't take the chance to do it before the new guy came.
Jim Bianco, thank you so much, as always for your insights. This really is going to be the debate. How does fedhair J. Powell position himself and position the FMC is being politically independent at a time that's highly politically charged. We hear every single day about the FED share from this president.
The redo of independence is the core issue, particularly of the heritage of the fedback to nineteen fifty one, and it's under threat, no question about that. It'd be interesting to see if the President gives way. Is Bob Michael mentioned the FT article today talking about well maybe it isn't one hundred percent or ninety percent, doctor Hassett, and you get to a point where there's a renewed debate. We'll have to see on that. To me, it's a
Chicago FED meeting. We had Goulesby dissenting, which is a shock in itself, and have Jim Bianco with this is wonderful. Diane Swank owns the high ground of Middle America with kp MG. She's not out of three zip codes in Manhattan and joins us this afternoon. I look Diane at this moment, and when I see Goulesby's descent, and it's sents me a Chicago descent. It's a descent of productivity.
Do we have any idea with this new AI that we have a new productivity that will allow for a better real GDP, a more effective and efficient America.
We don't know that yet. What we do know is that productivity growth has moved up, and that's because firms are doing more with less. We don't know that it's all from AI. We haven't seen enough adoption of AI yet to get there. And also what we don't know is how AI will be used, whether or not we'll see a lot of new jobs from this new innovation. That's usually what we see from innovation. Somealy, that's not what Silicon Valley is telling us at this point in time.
And also it matters who the gains of the AI actually accrue to. If those productivity gains continue to accrue to the owners of capital instead of workers, workers are going to feel left behind, and they're already feeling left behind because of the fact that the level of prices, as Jin pointed out, is just too high. Even if inflation were to cool from here, the level of prices are still too hot.
Lisa, I set up that question because I knew what doctor Swank would say. Who's going to be the winner of productivity? Who are going to be the winners out there, and that's the ultimate political tension.
Which is the reason why the fed's role in this is getting increasingly politicized. And i'd love your tech take on how this FED is taking into account productivity gains of AI and talking about goldilocks, because essentially that is the scenario that they laid out in their statement of economic projections.
Well, the Goldilock scenario really requires with productivity growth it to be broad based. And actually people always forget this part of it. If productivity growth, they raise their growth rates for next year. If productivity growth is driving gains in overall economic growth, it means we can actually have higher break evens on the FED funds rate because the economy can grow more rapidly without having to lower rates.
And I think that's important as well. And so we've really not seen all this yet and I think it's still ahead of us. I am worried about the fact that we're getting fiscal stimulus in the form of the largest tax refunds surge on record in the first and second quarter we'll hit between March and May, and we know that those tax refunds are treated like windfall gains due to the expansions of tax cuts passed in July
of last year. They're retroactive to beginning of twenty twenty five, and that's going to be a big bump in fiscal stimulus at a time when we're still feeling the inflation from both tariffs and changes in immigration policy, and I think that's really important. We're seeing service sector inflation pick up as well.
If that's the case, dine, why are not forward break even rates rising substantially. I was looking just now at the five year five year forward break even rates, and they actually went down after this FED decision, not up, even though exactly what you're saying, if you do believe that there will be something additional fiscal stimulus that would be inflationary, you would think that this rate decision would only encourage those inflation fears.
I don't think. I think we've seen some of it in financial markets already. The fact that it's not happening today doesn't mean it won't happen. And we've already seen some nervousness in the bond market, skidtishness about the size of debt that they have to absorb, the mega merger deals that are coming out that are also financed by debt. All of that together along with the fact that we're now going to see in twenty twenty six, the government debt is going to eclipse the size of the economy.
It has not done that since World War Two, and so we're moving into new territory, and I think a lot of things people are sort of looking at the way the world was rather than what's changing, and things are changing very rapidly.
If you are just joining us. We did get that FEDER rate decision. They did lower by twenty five basis points as widely as expected, nine to three vote three descents. The news really is that Austin Goolsby joined FED the Fed Schmidt in dissenting saying that they should not lower rates, who of course had Stephen Myron, a FED governor, talking about a fifty basis point cut dissenting on the other side.
Not as many descents as people had expected. The Fed did revert back to what we saw in the October statement, using language used just before pausing rate cuts, so potentially the last FED rate cut for a long time by this chair. J.
Powell.
I'm just wondering, Bob, if you think that right now this market is saying they are okay to do this, that the data that is available really doesn't signal that this cut and then maybe one more next year really is going to be inflationary.
Well, I think that's what the market's hoping for. I think there are a lot of businesses that we invest in where we do see the productivity gains from AI already. We also know within our own bank there are significant productivity gains, so some of that is already out there. The unfortunate price reset from pre COVID levels to today is also a problem. I get that, but that's damp and aggregate final demand. What do we want going forward?
Do we want the disinflation we seem to be in and what the FED is projecting, or do we want deflation where prices come down. I would argue we still want disinflation, and hopefully there will be a point in time in the not too distant future where wage growth and the trend in disinflation will normalize prices again. But all of that still is a headwind to consumption, so businesses are very careful how much cost increases they push through.
Now, can I do a counterfactual, please, Diane Swank if we got a fifty beep Myron cut, what would happen to the American economy now? With the financialization of the American system, If you gave us a fifty beep cut now, it'd be a veritable banking explosion, wouldn't it.
It would certainly add a lot more stimulus to what we're already seeing. And stimulus is heat. Heat is inflation unless you can really get all those offsets from AI in the right places. And I think that's the hard part is the old economy is where the tariffs are hitting the hardest in manufacturing activity, and we are seeing it come through in prices. And we're also seeing labor shortages even as the labor market weekends in pockets where
immigrants have dominated. That's showing up in prices as well. In Howmelda Care childcare costs all soaring. That was just in September, and those shortages have only gotten worse since then.
Lisa, two twenty twenty. I looked at the clock right when Diane Swank said tariffs one. First time we got the tariffs was twenty minutes into the show. For most of our audience, tariffs are a big deal they're affecting their groceries, their healthcare, everything in the service sector as well.
Yeah, plastic Christmas trees fifteen to twenty percent higher because of tariffs. There you go. So this also is.
A real Christmas tree of fake okay Christmas tree.
It's so increasing the real ones because of other people. Diane Swank, Well, let you stay out of this conversation. Thank you so much for being with us. Joining us now for this conversation, not this conversation. Matt Lazetti of Deutsche Bank with us as you typically do before the FED press conference. Matt, just first, what's your impression nine to three? Is this what you thought would happen.
Yeah, to be honest, I think in terms of the statement, the SEP, the descent, so I think it was very much in line with expectations. You know, certainly there was scope to get greater descents from a hawker's direction than what we got. I think for regional FED presidents potentially Governor Barr was also leaning against this cut, but we always thought that it was the job of chair pal through the statement the language change that we got there.
But then I think coming up through the press conference signals that he sends to try to rein in some of those descents to have a hawkers message that allows, you know, those officials to speak through that. And so I think we probably got that as well. You know, you're seeing markets respond by taking rates down. I don't think that's really anything that we saw in the statement
or the SEP or the descent. I think it really was the FED ramping up reserve management purchases, these T bill purchases a little bit earlier than was expected.
Matt Lazetti Binki Chada is high on the street looking at the equity markets. He says, the stock market's going to go up, up, up. How do you attach Lizzetti economics to bankram Chada's huge equity outlook?
Yeah, I think you know the good thing about how we do it here, it's internally consistent. So I think Binkie takes our economic growth forecasts are global economic growth forecasts, and builds that into his earning projections. We have two point four percent growth for the Yose economy over the next year. That was sounding I think, quite bullish relative
to consensus expectations. But I would note the FED median forecast came up to two point three percent today, I think was revised higher than what many anticipated and is now much closer to our own expectations. So I think these two things are mutually reinforcing. We see a stronger growth backdrop, we see financial conditions easing through Binkie's equity channel, and those two things reinforcing each other over the next year.
Matt, your other colleague Jim Reid, put out a provocative question earlier this morning, saying, what if the next FED move was up? At what point do you think that the move that the Fed is laying out really sets up that counter factual in a more real way.
Yeah, certainly a provocative question, and I think over the next year we are getting more questions about that, and I think it's more coming from the global sphere. At this point. You're seeing places like the RBA turn a little bit more hawkish. There's questions about the ECB Bank of Canada seeing stronger economic data as of late. For the FED specifically, though, I think you need two things to happen. One, you have to have a clear elimination of downside risks to the labor market. We are not
there yet. There's still some fragility in this labor market over the next several months, perhaps by the end of next year, we could get there. And two, you need the labor market to return as a source of inflationary pressure, so you need the unemployment rate to decline, quits rate to move higher, and wage growth to accelerate. It's possible. I think you are seeing a substantial reduction and labor
supply in the US economy. I think if you were to add on even more physical stimulus, So if we were to get these two thousand dollars stimulus checks from the Trump administration, I think that's the type of dynamic where that could really shift the debate. People would begin to think a little bit more actively about rate cuts in the US. But to be clear, I don't think we are there. Our baseline expectation is the next move is a cut.
Bob, What do you think. What do you think it would take for the Fed's next move or a move next year to be a rate hike and not a cut.
Well, I think you'd have to see the fiscal stimulus from the One Big Beautiful Bill Act hit and accelerate business investment and consumer spending. You'd have to see a labor shortage resulting from that then you'd have to see a wage price spiral. Maybe you'll see that in the second quarter, But right now, the FED thread at the needle. Can't we just enjoy this into the holiday sees I you know us.
That's the smartest thing i've today. That's the smartest thing I've heard in Powell's opiniata. I get that. But the bottom line is we have a prosperous economy for the halves. Let's not upset that apple cart while everyone well meaning tries to help people that are struggling so much. I mean, that's threading the needle right now, is what we're doing.
Well, Yes, but let's not forget that. The One Big Beautiful Bill Act also has no taxes on tips, over time social Security payments. A lot of those are concentrated in the bottom couple quintiles of earners, so there should be some relief coming there.
Where's your lack of conviction? That was Eddie on an outlooking off of this FED meeting today. Where's the question of your conviction in the next year? What are you most worried about?
Yeah, I think in the very near term is that the labor market dynamic, which is this fragile equilibrium with low hiring and low firing breaks to the downside, they begin to see layoffs pick up. I really don't think we see that evidence as of yet, but it's a real risk over the next several months. I think over the course of twenty twenty six, I think there's some
risks to the upside here. You know, as Bob mentioned, on the fiscal side, the stimulus checks that have been floated not part of our baseline, but would be a very real upside risk. And then I think we just can't put the side these risks around FED independence. And you know we heard Treasure Secretary best In talking about regional FED president and we have to go through those votes. And you have a Supreme Court case for Lisa Cook
coming up early next year. So there, I think that there are a lot of risks associated with it from a FED independence perspective. Inflation risk potentially to come along end of the bond market also at risk potentially from that.
Matt, we have about three and a half minutes before the press conference begins. From your perspective, what's the one question you have for FED Shair J.
Powell.
Potentially at the last FED cut that he oversees.
Yeah, I think it's a little bit around the language that they introduced into the late market, into the statement how are we to think about that? Is that clearly sending a signal that there's a much higher bar in the near term. I also would ask him, are you internalizing what could be a very weak jobs report next week in today's decision. I think that's a really important thing for the market. I think the Fed would probably want to take out some of the sensitivity to next
week's data. I think one of the reasons that chairpal wanted to push this great cut through was an expectation you could see some weakness there. My expectation is next week's data is going to be volatile. They are really putting more weight on the December jobs report in early January and the data we're going to get early next year in that assessment. But I'd like to get confirmation of that from the chair today.
Matt Zetti, thank you as always for your time, and I look forward to hearing what you think after the FED conference. This is an important point. How much is this in some ways forecasting that December sixteenth jobs report that we should have already had. It should have been sort of one two punch for last Friday. We got the November jobs report, they took that data into hand, and then this meeting they respond to it.
Bob, Yeah, I think you can go back to September and say, this is another risk management adjustment to policy, that there are some signs of a soft labor market. You're far away from what you're forecasting as your neutral rate. Why not take another twenty five basis points off of that. It will help corporate America. I'll get a lot of questions in the next few days. Does twenty five basis points actually do anything. Let's remember most of corporate America
are small and middle market businesses. Think of a fifty million dollar EBAA company, they generally have seven times levers. They've got three hundred and fifty million dollars worth of debt on top of fifty million in IBADA. It helps them a lot. It helps stabilize middle market corporate America significantly.
If we say it's an original meeting, we've got to stagger to the next meeting. It will be wiser, we'll have data and all that. But as Lisa mentioned at the top of the show, the political overlay here is extraordinary. What did JP Morgan's Washington experts say about the politics of January?
Well, the question I would want to ask pal is were there only three descents or was there a considerable amount of bargaining to go from five descents to three descents? And was that in the statement? And then you ratcheted it up GDP half a percent from where you were at the last summary of economic projections. His answers to questions like that will tell you how politically influenced the current Federal Reserve Board is.
That was a fantastic question, and I hope that he guts asked that we really look to understand just what kind of clutch the Fed share holds over this committee. Bob Michael as always, thank you so much for being with us for all this time. Truly always one of the absolute best. Right now in markets a collective sigh of relief. It could have been a lot worse. That
is sort of the message coming from it. The S and P up a tenth of a percent, NASDAK still suffering a little bit down to tens of a percent, suffering, I say, still near our all time highs. And the Russell two thousand, seeing that pop up six tens of a percent, which you are seeing in the bond space twos,
tens and thirties. Is this lift to a bond price down and yield as people expect to see some sort of bond purchases as well as a rate cut coming in next year, it really seems to me that Jay Powell really has the chance to split the difference.
I'll have to see. I'm going to watch some bond vigilantes. I think they're in the press conference as well.