As broadly expected, the FOMC cut the target range for the fed funds rate by 25bp today to 4.25-4.5%, but as Chair Powell indicated at the press conference, policy is now entering a “new phase” where the Committee will move more cautiously. This hawkish tone was also reflected in other developments today, including the median ’25 dot, which now looks for only two cuts next year instead of the four cuts expected in September. The median core PCE inflation forecast for next year was revised up 30bp to 2.5%, and Chair Powell hinted that this could reflect some participants assumptions for trade and other policies. Moreover, the dots of four participants implied no cuts were warranted at today’s meeting, one of whom— Cleveland Fed President Hammack—dissented to today’s action in favor of no cut. Consistent with this, Powell indicated that today’s decision was a closer call than prior cuts. Finally, the statement added a phrase about “the extent and timing” of additional adjustments, language which is consistent with a Fed on hold at the next FOMC meeting in late January. Powell indicated four reasons for these hawkish turns: less concern about labor market weakness, higher inflation outturns and risks to the inflation outlook, the fact that rates are now 100bp closer to neutral than they were at the start of the cutting cycle, and higher uncertainty motivating a slower path back toward neutral. We continue to expect the Fed on hold at the January meeting, with the next cut not until March.

Unpacking some of the developments, in the statement there were no changes besides adding the earlier-mentioned phrase “the extent and timing” when discussing potential additional adjustments to the funds rate. Powell elaborated that this was inserted to indicate that policy is “at or near a point at which it will be appropriate to slow the pace of further adjustments.”

In the dots, which are submitted at the beginning of the meeting, four of 19 participants put down no change in rates today. Presumably one of these was the dissenter Hammack, while the other three were either non-voters or changed their minds over the course of the two-day meeting. In the ’25 dots, not only did the median revise up by 50bp, only five participants now look for three or more cuts in ’25, vs. 17 in September. The median expects two more 25bp cuts in ’26 and one more in ’27 to get to 3 1/8%. This is only 25bp above the September projection, consistent with Powell’s remarks about uncertainty motivating a slower pace of policy adjustments. As expected, the median longer-run dot continued its upward journey, up 1/8th to 3.0%.

In the economic forecasts, the only notable and surprising revision occurred to the median core PCE inflation forecast, which was revised up 30bp in ’26 to 2.5% and 20bp in ’27 to 2.2%. This occurred even though the unemployment rate forecast was only nudged lower next year by 10bp and is still projected above its natural rate. So this looks like a supply-driven revision in the inflation outlook as would be consistent with higher tariffs, and Powell indicated some participants took a very preliminary step to incorporate the economic effects of post-election policies. In September most saw risks to the unemployment rate weighted to the upside but now most saw them as balanced. In contrast, back in September most saw inflation risks as balanced but now a large majority see them weighted to the upside.

In the press conference Powell was, in his own words, “very optimistic” on the economy, calling its recent performance “remarkable.” He described policy as now “significantly less restrictive” than at the start of the easing cycle, though still “meaningfully restrictive.” On the labor market Powell said downside risks “appear to have diminished” though “it’s clearly still cooling further.” On the inflation outlook Powell was perhaps less worried than the median SEP forecast: goods inflation is where it was pre-pandemic, housing service inflation is now coming off, and market-based non-housing services are in “good shape.” On policy, Powell didn’t quite say the “recalibration” phase is over, but that we are now entering a new phase. Having moved “pretty quickly” in the first phase, it’s now “appropriate to move cautiously.” Powell didn’t have to field any questions this time on the president’s removal authority, nor did the topic of balance sheet policy come up. On a related note, as anticipated the FOMC lowered the overnight reverse repo rate by 5bp relative to the target range, thus dropping it from 4.55% to 4.25%.