Comforting words on inflation
Powell painted a relatively benign picture of the economy, with solid growth and productivity improvement expected in 2026, along with a favorable inflation outlook.
The Fed’s perception of inflation is, in our view, the critical issue.
Just a few weeks ago, we heard hawkish rhetoric from various Fed officials, including Boston Fed President Susan Collins, who said in mid-November there was a “relatively high bar” for further rate cuts because of the inflation threat.
After some notable mid-month volatility, the market later responded positively to New York Fed President John Williams, perhaps the most influential committee member after Powell, who expressed more openness to rate cuts. That set the stage for expectations of a quarter-point cut, which was almost fully priced in going into today’s meeting.
Whereas in previous meetings Powell has expressed a lot of concern that Trump’s tariff policies could potentially create persistent inflation, in his remarks today, he seemed to acknowledge that they would likely just have a one-time impact.
He said he remains vigilant on inflation but told reporters that most of the “excess inflation” that we are currently experiencing was happening in goods that were specifically affected by tariffs. These price increases, he indicated, were unlikely to be seen again in future periods.
This was an important statement since tariffs are frequently cited as the main impediment to getting to the Fed’s goal of 2% inflation rates.
Minimal dissent
Despite the numerous Fed officials who expressed reservations about rate cuts just a few weeks ago, there were only two dissenting votes in favor of no cut.
One was from Austan Goolsbee, the Obama administration economist who became President of the Chicago Fed in 2023. The other one was from Jeffrey Schmid, President of the Kansas City Fed.
In the other direction, Stephen Miran (the Trump economist who was recently named on a temporary basis to fill a vacancy on the Board of Governors) wanted to see a steeper half-point cut.
Given the large number of voting members who spoke out in November, the positive market reaction today perhaps also reflected relief that opposition to the rate cut among members of the committee was marginal.
Preparing for a new regime
At a cabinet meeting in early December, Trump said he will announce a new Fed Chair “probably early next year.” Although there are a few candidates in the mix, most people seem to think it will be Kevin Hassett, who currently advises the President as Director of the National Economic Council.
Prediction site Polymarket now places the odds of Hassett getting the nod at over 70%.
