As expected, the Federal Open Market Committee (“FOMC”) maintained the fed funds target rate at 3.75% to 4.00%. Beth Hammack and Lisa Cook both dissented, preferring a 25-basis point hike. The statement reflected a slight change as it relates to economic activity, stating it is growing at a “strong” pace versus last month’s “solid” pace. More notably, the statement included an acknowledgment that “the accumulation of more information will help the Committee determine the policy stance” necessary to get to its 2% inflation target.
During the press conference, Fed Chair Kevin Warsh continued the theme from September’s meeting, citing geopolitical events as a driver of uncertainty, strong U.S. GDP led by healthy consumer spending and accelerating business investment, and a labor market that reflects both lower unemployment rates and claims. He reiterated the responsibility of the FOMC to commit to a “timely return” to the inflation target and cited evidence of tightening financial conditions following September’s hike, notably greater discernment in capital allocation decisions.
He also spent several minutes describing the Fed’s “new monetary medicine” – a doubling down on the 2% inflation target, a responsibility to deliver on that target apart of exogenous factors (perhaps referring to fiscal policy and geopolitical uncertainty), and a new framework for how the FOMC thinks monetary policy and its transmission should operate prospectively. The Fed’s role in Warsh’s terms is to “interrogate reality”, with an emphasis not on a fixed individual date or isolated data point, but on delivering price stability through clear objectives and strategy.
Warsh chose the press conference to lay out the new meeting cadence for 2027 and 2028. The FOMC will continue to meet eight times a year, but in 2027 and 2028, one and two meetings respectively will be focused on broad strategic discussion and therefore will not yield monetary policy action and/or a statement from the Committee. While changes to the Fed’s calendar were anticipated, the decision to release the new schedule ahead of the findings of the five new task forces was somewhat surprising.
In our view, the overall tone of the press conference was more dovish than September. While the probability of a rate hike in December remains very high, a look ahead to 2027 reflects a slightly lower probability of further hikes. The “information rich” period from now through the December meeting seems particularly important in determining the rate of hikes. In addition, the multiple references to tightening of financial conditions may indicate that the Fed is increasing its reliance on real-time data, and the references to correlations point to both economic and market data as relevant to the Fed’s analysis. Guidance, however, was difficult to glean; if anything, the Fed’s reaction function appears to be a work in progress, and that could translate to greater volatility in the short term even as the Fed attempts to move away from a role as market maker during Warsh’s tenure.
Stocks were modestly higher and short-term yields drifted lower following the meeting. The first of the major data points likely to color the Fed’s December decision comes tomorrow, with the release of September PCE; non-farm payrolls for October follow next Friday. In addition, with the filing of Anthropic’s S-1, and equity and debt issuance related to AI buildout continuing at a steady pace, the potential for tighter conditions and liquidity to weigh on the narrative remains a concern coming into the final two months of the year. We have shifted to a modestly more conservative stance ahead of this period, decreasing our U.S. small-mid cap and emerging market equity exposure while leaning into U.S. large cap and Japan. In fixed income, we have trimmed duration and kept credit exposures near target levels. In private markets and alternatives, we have added to commodities and are holding private equity and private debt at target.
