Headline: Fed Split on Rate Path as Inflation Risks Linger; December Cut on the Table
The Federal Reserve cut the federal funds rate to 3.75–4.00% at its latest meeting, but officials remain divided on what comes next. While many policymakers favor holding rates steady through year-end, others see room for an additional reduction in December if incoming data align with their outlooks. Most agree that, over time, policy should gradually ease toward a more neutral stance.
Officials noted a cooling labor market backdrop, with slower job gains and rising downside risks to employment. At the same time, inflation has picked up from earlier in the year and remains somewhat elevated, with upside risks persisting. Several participants expect core goods inflation to firm over the next few quarters as tariff effects continue to pass through to prices. Consumer spending also appears uneven: higher-income households are supported by equity market gains, while lower-income households are dialing back.
On balance sheet policy, nearly all participants endorsed ending quantitative tightening on December 1, citing reserve levels that are approaching “ample.” Staff projections anticipate GDP growth running above potential until 2028, though uncertainty remains high. Tariffs are expected to add upward pressure to inflation in 2025 and 2026, and some officials flagged stretched asset valuations with the potential for a disorderly drop in equity prices. Views on the recent decision varied: many supported the cut enacted at this meeting, some could have backed either a cut or a hold, and several preferred no reduction. Notably, Stephen Miran argued for a larger 50 bps cut, while Jeffrey Schmid favored no cut.
Key Points: – Federal funds rate lowered to 3.75–4.00%; policymakers split on the near-term path – Many favor holding rates steady for the rest of the year; several see a December cut as appropriate if data cooperate – Inflation has re-accelerated and remains elevated; tariff pass-through seen lifting core goods prices – Labor market risks have increased, with slower job gains and rising downside risks to employment – Quantitative tightening set to end on December 1 as reserves approach ample levels – Staff outlook: GDP growth above potential through 2028; risks include higher inflation from tariffs and stretched asset valuations
