On the December FOMC

We got the 25bp rate cut markets have expected since the October FOMC. The “dot plots” for 2026, 2027 and 2028 were unchanged, collectively calling for just two more cuts from here over three years. The statement language made it clear that after today, the Fed is on pause. Powell’s language in the presser gives the impression he believes that policy is now effectively neutral. We more than agree – it is arguably slightly loose, with a funds rate below any published “Taylor Rule” and the nominal 10-year yield. The only surprise was the announcement that the Fed intends to buy $40 billion in short term Treasuries and make its standing reverse repo facility unlimited. The end of quantitative easing was announced in October, and arguably this means we are at the start of a new regime of quantitative easing. There was only a single question in the press conference about this seemingly major development, and Powell deflected it claiming it is entirely technical and not indicative of a new policy direction. We’ll see.