On Wednesday, the Federal Reserve Open Market Committee raised “no alarms or surprises,” to quote the Radiohead song, by cutting its key overnight borrowing rate in line with Wall Street expectations.
However, after the latest quarter-point reduction to 3.5%-3.75%, there is enough noise around future rate cuts to make the British rockers led by Thom Yorke proud.
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The 9-3 decision, which featured the largest number of dissenters since 2019, highlighted a split between FOMC members who believe more cuts are needed to shore up the labor market and those who believe further easing would increase inflation. “Everyone around the FOMC table agrees that inflation is too high and we want it to come down, and they agree that the labor market has weakened and there are more risks,” Chairman Jerome Powell told reporters at a news conference. “The difference is how you weigh those risks and what your prognosis is. It is very unusual to have persistent tensions between two parts of the mandate.”
The latest reading of policymakers’ preferred inflation gauge was well above the official 2% target of 2.8%. Powell said the Federal Reserve expects that figure to slow to about 2.4% by the end of 2026 and for unemployment to remain at 4.4%.
The FOMC’s post-meeting statement suggested the bar for future cuts is higher. The Fed’s so-called dot plot, which tracks officials’ anonymous forecasts, puts the median view at just one rate cut in 2026. That means Powell, whose term ends in May, could have taken his final jab at the salami. However, for at least one more day, markets celebrated the third consecutive rate cut under his leadership:
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Rate-sensitive investments rose on Wednesday. The Russell 2000 small-cap index rose 1.3% and the State Street SPDR S&P Homebuilders ETF rose 3%. UBS analysts have found that since 1970, stocks are at their best “when the Federal Reserve makes cuts in non-recessionary periods,” with an average annualized return of 15%.
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Others think that optimism is exaggerated. “The rose-colored glasses may disappear once investors realize that the path to lower interest rates may take longer – or may not materialize at all – to the extent they believe it will,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
Who’s next? President Donald Trump said Tuesday that he will interview “a couple of different people” to succeed Powell. He is expected to speak this week with Federal Reserve Governor Kevin Warsh and the presumptive front-runner, National Economic Council Director Kevin Hassett. Other potential candidates, the Financial times According to reports, they are the governors of the Federal Reserve, Christopher Waller and Michelle Bowman, and Rick Rieder, of BlackRock.
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