Powell Turns Hawkish: December Rate Cut Far from Certain, Government Shutdown May Force Fed to Hit the Brakes | Golden Ten Data

The Federal Reserve has cut interest rates by another 25 basis points and ended its balance sheet reduction ahead of schedule. During the press conference, Powell sent out cautious signals, emphasizing that there is still significant uncertainty over whether to continue cutting rates in December, leading to dramatic market reactions.

FOMC Statement

1. Statement Overview: Interest rates were cut by 25 basis points to 3.75%-4.00%, marking the second consecutive meeting with a rate cut. Milan supported a 50 basis point cut, while Schmidt supported keeping rates unchanged.

2. Ending Balance Sheet Reduction: Balance sheet reduction will end on December 1, after which the principal from maturing mortgage-backed securities will be reinvested in short-term Treasury bonds.

3. Labor Market: Employment growth has slowed since the beginning of the year, and the unemployment rate has slightly increased, but as of August, it remains at a relatively low level.

4. Inflation Outlook: Inflation has risen compared to the beginning of the year and remains relatively high, with little change from previous statements.

5. Economic Outlook: Economic activity is expanding at a moderate pace, whereas previous statements noted that economic growth had slowed in the first half of the year.

6. Government Shutdown: Due to missing data from the government shutdown, the opening wording of the statement changed from "current indicators" to "available indicators."

Powell's Press Conference

1. Interest Rate Outlook: This rate cut is similar to the risk-management cut in September. A December rate cut is far from certain, and missing economic data could be a reason to pause rate adjustments. If information is lacking and conditions remain unchanged, there is reason to slow the pace of rate cuts. The committee is seriously divided on what action to take in December. More and more officials want to delay rate cuts, believing at least one cycle should be waited out.

2. Government Shutdown: The government shutdown has cut off sources of economic data, but existing data shows little change in the outlook. Private data is referenced, but it cannot replace official data.

3. Inflation Outlook: Inflation remains somewhat high, with recent inflation expectations rising, but long-term expectations are stable. Excluding tariffs, core PCE may be 2.3% or 2.4%, so inflation is not far from the 2% target.

4. Labor Market: Unemployment claims data from each state signals that things remain unchanged, and the labor market appears to be gradually cooling. Excluding duplicate statistics from the Bureau of Labor Statistics, employment growth is almost zero.

5. Economic Outlook: Current data shows the economy is expanding moderately, with this year's growth rate expected to be around 1.6%. The rise in default rates does not indicate broader credit issues, but the credit market is being closely monitored.

6. Ending Balance Sheet Reduction: There is significant pressure in the money market, requiring an immediate halt to quantitative tightening. Bank reserves are only slightly above adequate levels, so a buffer needs to be provided in advance.

7. Tariff Impact: Tariffs may cause the inflation rate to rise by another 0.2, 0.3, or 0.4 percentage points, but the base expectation is that the impact of tariffs will be temporary.

8. Stock Market and AI: (Asked about high stock market valuations) It is not our responsibility to focus on any single asset. Artificial intelligence is different from the bubble of the 1990s, as companies are already profitable.

9. Market Reaction: When the statement was released, various assets fluctuated before stabilizing. After Powell mentioned the December rate cut issue, risk assets fell across the board, U.S. Treasury yields and the dollar surged, the two-year U.S. Treasury yield rose 10 basis points intraday, and gold fell by $40.

10. Latest Expectations: As of press time, the market expects a 65% probability of a Federal Reserve rate cut in December, down from 83% before the meeting. The year-end rate expectation has risen by 4 basis points to 3.04% compared to before the meeting.