MNI: Fed Cuts Rates, Higher Bar For More; Resumes Asset Buys

A divided Federal Reserve lowered interest rates for a third time this year Wednesday, with officials indicating a higher bar for future cuts as borrowing costs reach the range of what policymakers see as neutral.

Policymakers penciled in one more rate cut in 2026 and in 2027 on median, unchanged from the September Summary of Economic Projections.

"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks," the Fed said in its post-meeting statement.

Three officials dissented against the decision, the most since 2019. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid wanted to keep rates on hold while Governor Stephen Miran voted for the third time in favor of a larger 50 basis point reduction.

The Fed's dot plot showed four other non-voting members also wanted to keep rates on hold.

The new federal funds target range of 3.5-3.75% is now around the upper end of officials' estimates for the long-run level of the benchmark target, which is seen as a proxy for a neutral rate that neither boosts or dampens economic activity.

BACK TO BALANCE SHEET EXPANSION

The central bank also said it is immediately resuming bond purchases after allowing its balance sheet to shrink for three years, sooner than analysts expected.  The New York Fed's markets desk said it will buy USD40 billion in Treasury bills over the next month and the pace of buying will "remain elevated" for a few months.

"After that, the pace of total purchases will likely be significantly reduced in line with expected seasonal patterns in Federal Reserve liabilities," the Fed said.

SEP

FOMC members sharply revised their GDP views for 2026 higher to 2.3% from 1.8%, while inflation and unemployment projections were little changed.

The Fed's forecasting capacity has been hampered by the absence of official government data that have just started to trickle back in after a prolonged shutdown. According to the latest available figures, which run only to September, PCE inflation rose 2.8% while the jobless rate stood at 4.4%.

NEXT YEAR

Fed Chair Jerome Powell will face questions in his press conference about a range of issues including how he's thinking about the outlook for employment and inflation, as well as how the central bank plans on navigating a leadership transition next year.

President Donald Trump is expected to name a replacement for Powell, whose term as chair ends in May, early next year. Trump continues to exert unusual public pressure on the central bank to lower interest rates even further, and has threatened in the past to fire Powell and attempted to fire Governor Lisa Cook in a case that is still pending before the Supreme Court.

Given the president's propensity for institutional shake-ups, market participants are braced for potentially consequential changes in personnel and policy approach next year.

National Economic Council Chair Kevin Hassett is currently seen as the leading contender but Trump is still interviewing other finalists like Fed Governor Chris Waller and former governor Kevin Warsh.