– Powell Signals Pause, Saying FOMC Can Now ‘Wait and See’ How Economy Evolves
– Powell: After 175 BP of Easing, Funds Rate in ‘Plausible’ Range of ‘Neutral’
– FOMC Declares Reserves ‘Ample’; to Start Buying Shorter Term Treasuires
By Steven K. Beckner
(MaceNews) – At their final monetary policy meeting of 2025 Wednesday, a sharply divided group of Federal Reserve policymakers cut short-term interest rates modestly again but left in doubt when and by how much further the Fed will lower rates next year.
The Fed’s rate-setting Federal Open Market Committee cut the federal funds rate by 25 basis points for a third straight meeting, bringing the central bank’s policy rate down to a target range of 3.5% to 3.75% (a median 3.6%).
Including the 100 basis points of cuts it implemented in the fourth quarter of 2024, the FOMC has now eased by a total of 175 basis points. Yet the latest incremental reduction still leaves the funds rate 60 basis points above the FOMC’s unrevised 3.0% estimate of the “longer run” or “neutral” rate.
The Fed is probably not done — certainly not if President Trump has his way. The president has stridently demanded aggressive rate cutting ever since his inauguration, and National Economic Council Director Kevin Hassett, his reputedly leading candidate to succeed Chair Jerome Powell in May, has made clear he’d be happy to oblige.
However, before the FOMC gets back to moving the funds rate further “toward neutral,” there may well be a pause, at least until its March 17-18 meeting, based on what Powell said in his press conference and based on the rate projections of the 19 FOMC participants.
Powell repeatedly told reporters the Fed is now “well-positioned” to “wait and see” how the economy evolves before considering additional rate cuts. And he said the Fed is now within the upper range of estimates of funds rate neutrality.
The FOMC’s policy statement also seemed to imply a pause by reinserting in its key third paragraph language that implies a wait-and-see approach: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” (The “extent and timing” phrase was added to what had been a more ambiguous sentence).
By the end of 2026, FOMC participants project the funds rate to reach 3.4% — still 40 basis points above putative “neutral.” But, as Powell made clear, there seems to be no hurry to take that next step down.
Once again, sharp divisions on the Committee were reflected by a rare three dissents. Fed Governor Stephen Miran again dissented in favor of a 50 basis points rate cut, while Chicago Federal Reserve Bank President Austan Goolsbee and Kansas City Fed Preisdent Jeffrey Schmid both voted against the rate cut because they preferred to leave rates unchanged.
In other action, the FOMC made the determination that reserve balances have reached an “ample level” and that the Fed will begin buying short-term Treasury securities “as needed” to maintain them at such levels.
Powell, who at the time of the FOMC’s Oct. 29 rate cut, had said a Dec. 10 rate cut was “not a foregone conclusion” because of “strongly differing views about how to proceed,” didn’t totally rule out another rate cut at the Committee’s Jan. 27-28 meeting, but strongly suggested that is an unlikely outcome by saying Wednesday’s rate cut leaves the FOMC “well positioned to wait and see how the economy evolves from here.”
He also warned that the FOMC will have to be wary of the economic data that will be available in January, because it could be “distorted.”
Besides, the cumulative effect of the 175 basis points of easing done over the last 15 months has already made monetary policy less restrictive and less in need of further easing for the near term, Powell suggested.
“This further normalization of our policy stance should help stabilize the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariffs have passed through,” he said in an opening statement.
He added that “the adjustments to our policy stance since September bring it within a range of plausible estimates of neutral and leave us well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks” – a theme he would return to again and again in response to questions.
After 175 basis points of cuts, “we have moved back our policy back down to where it is certainly not strongly restrictive at this point,” he said. “I think it is sort of in the range of neutral.”
Yet there seemed to be a certain easing bias implied by Powell’s remarks, as well as by the SEP>
Looking at the Fed’s “dual mandate” goals, the Fed chief said there is a strong “base case” for believing that tariff-related increases in goods prices, which have been rising much more than services prices, are a “one-time” phenomenon that will give way toward resumed progress toward the Fed’s 2% inflation target.
However, when it came to the “maximum employment” side of the Fed’s mandate, Powell repeatedly expressed concern about the cooling of the labor market and upside risks to unemployment.
“The labor market seems to have significant downside risks,” he said, adding that even much more modest payroll gains reflect a statistical “overshoot” of about 60,000 per month that may be hiding greater weakness in hiring.
“In a world where job creation is negative, I think we need to watch that situation very carefully, and be in a position where we are not, you know, pushing down on job creation with our policy,” said Powell, whose term as chairman will expire in May and whom Trump has asserted will be replaced.
The FOMC had previously lowered the policy rate by 25 basis points on Sept. 17 to a target range of 4.0% to 4.25% and by 25 basis points to 3.75-4.0% on Oct. 29 — after standing pat for the first three quarters following 100 basis points of easing in the final three months of 2024.
In its revised Summary of Economic Projections, the 19 FOMC participants projected another 25 basis points of monetary easing will be done sometime next year, taking the funds rate down to a target range of 3.25% to 3.50% (a median 3.4%). By the end of 2027, the funds rate is projected to fall to a range of 3.0% to 3.25% (a median 3.1%.),
Again, the projections reflect divided viewpoints. While four officials projected a 3.4% funds rate by the end of 2026, seven projected the rate to stay at the current level of go higher, and eight projected bigger rate reductions.
The new funds rate “dots” were accompanied by revised economic forecasts. The officials now expect that PCE inflation will end 2026 at 2.4% — four tenths above target. Core PCE inflation is expected to close out next year at 2.5%.
FOMC participants markedly raised their 2025 GDP growth forecast from 1.8% to 2.3% — five tenths above their 1,8% estimate of the longer run GDP growth rate (or “potential”). The unemployment rate is forecast to remain at the current 4.4%.
In addition to the insertion of “extent and timing,” the FOMC’s policy statement contained other significant changes. In characterizing economic conditions, it stopped saying that the unemployment rate “remained low” in wake of a rise in the unemployment rate to 4.4%.
The year’s last FOMC meeting took place largely without the benefit of fresh statistics on the economy, owing to a record 43-day shutdown of the federal government. However, it was significant that the latest reading on inflation was favorable, as the Fed’s favorite gauge, the core price index for personal consumption expenditures moderated somewhat to a 2.8% year-over-year pace in September.
Despite the dearth of data, Powell and his colleagues assessed the economy as “expanding at a moderate pace,” a pace which officials expect to quicken in the year ahead.
The FOMC also made a significant change in its balance sheet strategy. After voting on Oct. 29 to stop shrinking the Fed’s vast bond portfolio (“quantitative tightening”) on Dec. 1, the FOMC did not merely reiterate that it “will continue to roll over maturing Treasury securities at auction and reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities into Treasury bills.”
Instead, the FOMC announced, “The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.”
In the first month, the New York Fed’s Open Market Trading Desk will purchase $40 billion of Treasuries.
Explaining the decision, Powell said “the Committee decided to initiate purchases of shorter-term Treasury securities (mainly Treasury bills) for the sole purpose of maintaining an ample supply of reserves over time.”
The purchases will start at $40 billion per month and “may remain elevated for a few months to alleviate expected near-term pressures in money markets,” he continued. “Thereafter, we expect the size of reserve management purchases to decline, though the actual pace will depend on market conditions.”
“In our implementation framework, an ample supply of reserves means that the federal
funds rate and other short-term interest rates are primarily controlled by the setting of our
administered rates rather than day-to-day discretionary interventions in money markets,” Powell went on. “In this regime, standing repurchase agreement (or repo) operations are a critical tool to ensure that the federal funds rate remains within its target range, even on days of elevated pressures in money markets.”
“Consistent with this view, the Committee eliminated the aggregate limit on standing
repo operations,” he added. “These operations are intended to support monetary policy implementation and smooth market functioning and should be used when economically sensible.”
In conjunction with the 25 basis point decrease in the federal funds rate, the FOMC lowered the minimum bid rate on standing overnight repurchase agreement operations to 3.75%. The offering rate on standing overnight repurchase agreements was lowered to 3.5%.
At the same time the Fed Board of Governors reduced the primary credit rate, at which it lends to member banks at the discount window (the primary credit rate), by 25 basis points to 3.75%. The rate of interest paid to banks on reserve balances was reduced to 3.65%.