• FOMC votes 10-2 to hold Fed Funds range steady — still 3.75% to 4%.
• Cook and Hammack voted for a hike. 
• Theme of press release: wait for more data. 
• Bottom Line: “Economy in good shape; let us see what inflation does.”

Stand pat

After several weeks of members’ speeches saying higher rates are needed to combat inflation, ten of the 12 decided to stand pat on rates. The press release did not suggest the Committee would raise rates at the December 9 meeting.

The statement’s new language, in italics, did, however, leave the door open: 

Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal.

What information can the Committee “accumulate?” There are two more unemployment reports and one more CPI report releases before the next meeting. Interestingly, the November CPI report will come out the day after the December 9 meeting. 

Warsh pointed out that the Fed has two mandates: full employment and stable prices. And he correctly stated that the Fed really has nothing to do, at the moment, with regard to jobs. The unemployment rate is near all-time lows at 4.2%. Initial jobless claims are at levels not seen since the 1960s (when the labor force was much smaller). 

Price increases are running between 3% and 3.7%, depending on which measure you choose. The Fed’s favorite gauge is the Personal Consumption Expenditure (PCE) series. The Core measure, which excludes food and gas prices, is running at a 3% clip, 1% above the Fed’s 2% target. The recent calculation changes to PCE cut inflation levels in ten of the last 12 months. Current drivers of inflation are split between fuel prices and consumer demand. Since the Fed is somewhat backward looking, lower apartment rents factoring into the next couple of inflation reports may support their case for standing pat. 

The Fed’s short term interest rate tool does not have much impact on global energy markets. It does affect consumer borrowing and demand on a six-to-twelve-month horizon. So, unlike the tariff spike, the Fed does have some leverage over price inflation. 

Analysis

The press release and most of Warsh’s press conference was fairly bullish. The economy is “expanding at a strong pace,” according to the press release. We would agree. The third and fourth quarters of this year are growing above 3% in real terms. Combined with a 3.5% inflation rate, our nominal GDP growth has not seen these levels since 2006. 

Warsh echoed our Monday morning call notes in stating that recent interest rate and credit spread increases had tightened financial conditions “somewhat.” In other words, rates rising three-quarters of a percent have done the Fed’s work for it. 

If the Fed believes the economy is strong and it does not have a need to raise rates today, then markets take away two big points. First, stocks can rally with steady short rates. Second, the weak quote above leaves bond traders in doubt, so their path of least resistance is to push rates higher. Oh, and higher rates are also a product of steady credit demand from all parts of the corporate world, not just A.I. capex. 

Digging in 

Two areas of note: one dissent and operational notes. Lisa Cook was one of the votes for a rate hike. She is a Fed Governor. She has repeatedly called for rate increases to combat inflation. She is also under scrutiny by the Trump Administration for mortgage disclosures. 

Chair Warsh also took the unusual step of laying out the 2027 and 2028 meeting structure. Next year, one of the eight meetings will not have a policy rate vote. And in 2028, two of the eight will not have a policy rate vote. We guess he thought this was an ideal time to warn the markets, but it likely creates a guessing game as to which meeting the policy vote will not occur. 

Summary

We do believe Warsh and the Fed are serious about running inflation down to their 2% goal. We doubt that it can be achieved within their three-year timeline. 

Bottom line: The Fed will find a reason to raise rates at least once more in the next six months. We are not buying into the three hikes by summer thesis. Capital spending, thanks to the One Big Beautiful full expensing rule, does not get enough credit for a continued expansion. The A.I. excitement will settle down as higher rates and funding costs crimp data center projects that should not get built. We think a steady economy and strong capital spending carries economic growth through 2027.

Please let us know how we can help you. 

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. 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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