On the October FOMC

Today’s 25 bp cut was fully expected. A subtle change in the statement language, the absence of a dovish dissent, and Powell’s outright statement in the presser that “policy is likely to remain appropriate” has “pause” written all over it. At 1.625%, the funds rate is below the YOY core inflation rate for the first time in over a year. It is below every rules-based estimate, and below the Fed’s calculated neutral rate. Critically, it disinverts the funds rate/10-year Treasury yield curve, for the first time in 5 months, which we see as the central, perhaps the only, indicator on Powell’s dashboard. Policy isn’t easy, but it is no longer tight. This removes a substantial drag on growth – which, as this morning’s GDP report shows, has already been penalized by the Fed’s too-tight posture until now. We expect there will be no hikes unless and until inflation and inflation expectations visibly strengthen, even if higher growth re-emerges.