The Federal Open Market Committee is likely to reduce its federal funds policy rate by a quarter point to a range of 3.75% to 4% at its meeting on Wednesday while also announcing the end of its quantitative tightening program this year.
We anticipate that the committee will update its policy statement to account for the ongoing U.S. government shutdown and the challenges of making policy in the absence of consistent economic data and pricing information.
In addition, we anticipate that Federal Reserve Governor Stephen Miran will dissent in favor of a 50-basis point cut.
The press conference on Wednesday will most likely see Federal Reserve Chairman Jerome Powell talk about the likely 25 basis-point rate cut and the Fed’s turn to a greater tolerance of risk. But Powell will carefully avoid any signal on what to expect in coming meetings.
To be sure, the serious players inside the Fed would view promises of further rate cuts as unwise given the fact that the September consumer price index rose by 3% on an annual basis and increased by 3.6% on a three-month annualized basis.
For the majority of Fed members, such an increase in inflation is not reassuring given accommodative financial conditions that are pushing risk taking and markets higher.
Other than what will surely be an informative press conference—there will be tough questions on the government shutdown, SNAP benefits ending and an increase in ACA premiums—it will be interesting to see how the committee in its policy statement leaves room to avoid a December rate cut without sounding too hawkish.
Finally, we expect the committee to announce the end of quantitative tightening, or reductions in its balance sheet, over the next four to six weeks, which will need to be accompanied by a change in the interest paid on reserve balances.
