Transcription
The Federal Reserve just delivered one of its most closely watched decisions of the entire year, a quarter point rate cut. Well, the headline sounds very simple. The background is anything but. In fact, this move is already being called quote a hawkish cut, which is one of those phrases that sounds contradictory, but actually tells you everything about how divided the Fed is right now. So, let's unpack what actually happened, why it matters, and what it could mean for the economy moving forward.
The Fed lowered its benchmark interest rate by a quarter percentage point on December the 10th, bringing it into a new target range of 3.5 to 3.75%. On the surface, that sounds like good news. Lower rates usually mean cheaper borrowing, easier credit conditions, and a more supportive environment for growth. But here's the twist. This wasn't a confident, unified step toward easier policy. The vote was 9 to3, which is a level of disscent that the Federal Reserve hasn't seen since 2019. And those descents reveal how tricky the Fed's position has become.
On one side, you had Governor Steven Myron, which as you know is a Trump pick, and he wanted an even bigger cut. he was advocating for a full half percentage point because he believes that the economy needs stronger support although he doesn't address uh associated concerns that point to increase in inflation. On the other side, two regional Fed presidents Jeff Schmidt from Kansas City and Austin Goldsby from Chicago voted to keep rates exactly where they were. In other words, we had one dove, two hugs, and a committee trying to chart a path right down the middle.
Now, something important happened alongside the rate decision. Something that didn't grab the same headlines, but absolutely matters. The Federal Reserve announced that it will begin buying $40 billion of Treasury bills per month starting December the 12th. If you hear that and you think, "Oh, great. more quantitative easing is coming. The Fed wants you to stop right there. They're insisting that this is not QE. Instead, they say that this is a strictly um this is strictly about managing reserves effectively. That's the Fed's position. Basically, refilling the banking systems tank after month of draining liquidity through quantitative tightening.
According to the Fed, reserves have fallen to the lower edge of what they consider ample. That's a central bank speak for uh we don't want to accidentally break something. And of course, they're serious about this. The New York Fed's open market desk expects uh these purchases to stay elevated for a few months because the system is facing a spike in non-reserve liabilities in April. After that, the plan is to taper off sharply. But whether it is QE or uh quote unquote reserve management, uh the effect is the same. We're going to get more liquidity entering the system at a time when the Fed claims that it's still trying to keep inflation under control. That tension is part of the reason markets are calling this a hawkish cut, I would assume. Yes, the Fed lowered interest rates, but with so many concerns and internal divisions that nobody thinks that they're moving toward a classic easing cycle.
And if you look at the Fed's own projections, you can understand why. Their famous dot plot shows that officials expect only one rate cut in 2026 and one more in 2027. That's it. They see the long run neutral rate sitting around 3% and they actually don't really appear to think that we're getting there anytime soon. Not only that, seven officials now believe that there should be no cuts at all next year. So, the Federal Reserve is as divided as it can be for an economy that most Americans feel is still too expensive. That is a pretty cautious stance.
Let's talk about the data driving this decision. The Fed now expects inflation to stand around 2.4% officially by the end of 2026, which is slightly lower than what they projected earlier this year, but it is still above their 2% target rate for years to come. In reality, nobody thinks that we're going to get there. We're not going to get to 2%. It is quite clear. But at the same time, they actually raised their forecast for GDP growth, bumping it up from 1.8% to 2.3%. That might sound uninteresting to some, but for the Federal Reserve, that is a meaningful shift. It means that they think the economy is running hotter than expected, and that makes them less comfortable cutting rates aggressively.
When it comes to the labor market, the Fed is choosing its words very carefully. Of course, the labor market has been weakening, and I've discussed this in multiple videos here on my channel. In Fed's words, job gains have slowed this year, and they acknowledge that quote, downside risks to employment have risen. Here's a translation for you. Companies aren't hiring much anymore. And while layoffs may not have truly exploded just yet, the risk is definitely growing. Private data backs that up, too. Challenger Gray and Christmas reports that employers have already announced more than 1.1 million layoffs through November of this year. That is not a crisis perhaps, but it is a definite warning.
Now, here's where things get even more complicated. The Fed itself is navigating political uncertainty. As you know, Jerome Powell is nearing the end of his term as uh the Federal Reserve chair. He only has three meetings left before uh President Trump appoints his successor. By the way, I recently uploaded a video on who's likely to become the next Fed chair. So, definitely check it out if you're interested. I will link that video in the description below. And Trump has made it crystal clear that he wants someone who favors lower interest rates, not someone who is concerned with inflation targets necessarily. All of this could shape what the Fed does or doesn't do over the next few months. A divided committee becomes even harder to manage when the chair's future is in question. Um, so to put that mildly, the Federal Reserve in a state of chaos.
And then there is the data problem too, which I don't want to ignore in this video. Because of the recent government shutdown that lasted until November, the Fed has been making decisions without the usual stream of reliable and uh current economic statistics. Think about how wild that is. The most powerful economic institution in the world has been operating effectively partly blind, relying on delayed or incomplete data, unofficial indicators and patchwork estimates. Effectively. No wonder there is disagreement inside the committee on uh the path forward.
So to sum it up, the Federal Reserve sent a very clear message. Yes, a rate cut happened, but uh don't get too comfortable. The road ahead is very uncertain. The committee is extremely divided, and the risks on inflation, growth, and the labor market, and everything in between are all moving targets, and one could argue they're rising.
So, let me know what your thoughts are on the recent Fed's uh move. I would love to hear from you. Thank you so much for watching. Please consider supporting my work. I appreciate every single one of you who has become a paid subscriber on YouTube, Substack, on Patreon. Thank you so much and I will see you back here tomorrow. Have a great rest of your day.