• Another quarter point cut; new range 3.75% to 4%.
• We think one more cut is in view, more likely in 2026.
• Two voters dissented, one wanting no cut and another a half point cut.
• Focus shifted from inflation to job growth.
• Fed will start buying more Treasury bonds beginning December 1. 

Another step

Today, the Federal Reserve Open Market Committee lowered its overnight Fed Funds range by another quarter point step. The Committee’s press release focused on a softening job market and their bond portfolio.

Two of the 12 voters dissented, each having a different policy view.

Powell stated in his press conference that more rate cuts are “far from” and “are not a foregone conclusion.” Wall Street seems to believe otherwise, as futures markets are positioned for another quarter point reduction at the December 10 meeting.

For much of the past decade, Chairman Powell and the FOMC have focused on returning inflation to a 2% annual rate. This was true in the post-2009 period when inflation was below that level and in the post-shutdown “transitory” period when the Consumer Price Index touched 9%. That focus was not evident in the September press release or in today’s. The only mention about inflation was that it “has moved up since earlier this year and remains somewhat elevated.”

Powell and the Committee believe that “the balance of risks” has shifted away from inflation toward a weaker job market. The Fed appears to be basing this opinion on slower job growth in recent months from the Bureau of Labor Statistics Employment Survey. Lower job growth and steady jobless claims reflect a labor market that is largely in balance. We think the Committee may have been spooked by layoff announcements from UPS, Amazon and Target, among others. 

10–2

Not a baseball score, but two dissenting votes are not surprising in this environment. Powell’s term as chair ends May 15, 2026. In the home stretch of prior chairs, the voting record suggests dissents increase as members seek to put their own stamp on the record. There is also a perception that members are jockeying to be considered for the next chair appointment. The president appoints the chair subject to Senate confirmation.

Stephen Miran joined the Committee from the Trump Administration in September. He is filling out a vacant seat term that expires at the end of January. President Trump has been vocal in his demand for lower interest rates. Lower rates would help homebuying and consumer borrowing activity. Miran’s votes at the past two meetings were for a half point cut following the Administration line. We expect he will do the same at the December meeting.

Kansas City Fed President Jeff Schmid voted not to cut the short-term rate. He has stated that inflation is still too high and that lower rates could artificially boost demand, pushing prices higher.

What’s next?

Wall Street is sticking with rate cuts in December and two next year. Futures markets have moved down odds to just two cuts by mid-year. We are on the side of fewer cuts as the economy is about to receive additional stimulus from the One Big Beautiful Bill Act in the first quarter, and tariff clouds are parting.

Starting December 1, the Fed will stop shrinking its bond portfolio. In 2022, the Fed began reducing the size of its bond portfolio by letting mortgage securities run off and not reinvesting all of its maturing Treasury bond proceeds. It has cut the portfolio from above $8 trillion to just above $6.5 trillion since then.

Pause for a moment and remember T accounting. When an asset on the Fed’s balance sheet matures, it reduces that side of the T account. The other side of the account is banking system reserves. When the Fed lowers its balance sheet, there are fewer reserves in the banking system to lend or leverage. Short-term funding with reserves has had some difficulties lately, so the Fed starting to buy more bonds will inject reserves into the banking system. Also, the Fed will be buying short-term Treasury Bills, which will have the effect of steepening the yield curve. 

Unknown

In the 42 days since the last Fed rate cut, a few market-moving events hit the tape. The Consumer Price Index’s latest reading of 3% will likely get revised higher once more housing data becomes available. Private surveys of activity have shown mixed, but not deteriorating, results. The five major wars are still underway, despite occasional ceasefire agreements. Corporate earnings remain strong, and the Fed is paying attention to the AI and data center mania.

The Fed justified its rate cut as a protection against a weakening job market. The state of the job market as defined by the BLS is unknown at this point. There is no timetable for staff to come in during the shutdown and compile survey data, if the survey collection process was even turned on.

Summary

We think the Fed cuts one more time after realizing that the economy is doing better than news reports suggest. That cut could be in early 2026 rather than December.

The government shutdown cuts the “hard” data source that Wall Street and Fed rely on. There will be some reaction by markets once the data starts flowing again. Perhaps Thanksgiving? Taking the under.

Anecdotal and private surveys suggest the economy is doing OK in some places and fine in others. In other words, rolling along at least in first gear.

We think the economy gets a boost in the first quarter of next year from the One Big Beautiful Bill Act in the form of increased consumer spending. Spending on data centers and AI buildout may moderate slightly but will still be a significant boost to the economy.

Tariffs will get negotiated lower with more foreign market access for U.S. companies. The steel and aluminum tariffs are a major sticking point, however.

Please let us know how we can help you.

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital’s Private Bank. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on X here.  

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