What's Next for the Market Now That the Fed Pivot Is in
The market is reacting poorly to a change in Federal Reserve policy.
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The pivot is in. Or so it seems.
On Wednesday afternoon, the Federal Reserve's Federal Open Market Committee released an official statement that conveyed a pivot from a stance on monetary policy that focuses upon the fight against inflation to one that aims to support labor markets and, by extension, the broader economy. The unfortunate reality is that for the central bank to satisfy both sides of its dual mandate, it must try to balance its focus as one or the other side of the dual mandate by necessity draws attention from the other.
How much of a pivot was this? Maybe not all that much. The quarterly economic projections, also released by the same FOMC on Wednesday afternoon, show a highly fractured committee where there seems to be both action and aggression present within the group. Hence, in order to pivot on policy, the committee must rob Peter to pay Paul. That said, there appears to be real disagreement between Peter and Paul behind closed doors.
The Statement
The official statement set the stage for change right away.
The second sentence of the first paragraph read, "The unemployment rate remains low, and labor market conditions remain solid" on July 30. That changed to "Job gains have slowed, and the unemployment rate has edged up but remains low."
That pretty much says all readers need to know.
Six weeks ago, the last sentence in the second paragraph read, "The Committee is attentive to the risks to both sides of its dual mandate." Wednesday's statement goes that far but adds: "and judges that downside risks to employment have risen."
Lastly, the statement gets down to business with this, "In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4 to 4-1/4 percent."
There was just one dissent to this decision as six Fed governors and five regional district presidents voted in unison. Brand new Fed governor Stephen Miran voted to reduce the target range for the federal funds rate by half of one percentage point rather than by a quarter of one percentage point. Neither Fed governors Christopher Waller nor Michelle Bowman, both of whom dissented in favor of a cut at the July meeting, stood with Miran at this meeting.
Economic Projections
There's really not a lot of change in the median expectations for most categories with the exception of the fed funds rate. For most other categories, while median expectations may have remained in line with where they were in June, the underlying range of expectations has tightened up somewhat.
The median expectation for 2025 GDP has improved from growth of 1.4% to growth of 1.6%, while the range of expectations also moved higher from 1.2% to 1.5% up to 1.4% to 1.7%.
GDP was where we saw the second largest movement across the entire menu of economic categories. The median expectation for the unemployment rate through 2025 remains at 4.5%. The median expectations for PCE inflation and core PCE inflation remain at 3.0% and 3.1%, respectively.
Now, we move on to expectations for the benchmark fed funds rate going forward. At the median, the FOMC sees by year's end, the FFR at 3.6%, down from 3.9%. This implies 50 basis points worth of rate cuts throughout the balance of this calendar year. According to the dot plot we see a tremendous difference of opinion.
There is one absurdly misguided dot back up at 4.4%, implying a 25 basis point rate hike by year's end. That's not happening. There is also one dot way down at 2.9%. Miran? That implies 125 basis points' worth of additional rate cuts over the next two meetings. This is also absurd and, in my opinion, had to be done simply to impact the median.
More realistically, nine dots imply 50 basis points worth of rate cuts over the next two meetings, which is highly probable in my humble opinion. Two dots imply one 25 basis point rate cut over those two meetings, which is also not unrealistic. Lastly, six dots imply that the FOMC is down for the year. I find that improbable, but I don't vote on policy, and they do. I no longer look very far out into the dot plot as it has been so inaccurate over the years, but at present, the median forecast is for another 50 basis points' worth of rate cuts throughout the eight policy meetings during calendar 2026. That is probably not quite as dovish as Wall Street wanted to see.
In Response...
Most of the yield curve has worked its way higher after first surging lower upon the release of the statement. The U.S. 10-year note paid just 3.998% as the material was made public. Less than an hour later, I now see U.S. 10-year paper yielding roughly 4.08%. Equity markets have turned red as well.
Tech stocks are taking it on the chin in the wake of this announcement by the Fed. Cyclicals are struggling as well. The fact that the defensives are leading since the release tells investors all they need to know about what exactly had been priced in. That does not mean that Fed speakers who were not on the docket will not show up over the next few days and manicure the Fed's narrative if it feels it has been misunderstood by our marketplace.
Just an FYI... fed funds futures trading in Chicago are pricing a 92% probability for a 25 basis point cut on October 29 and an 88% likelihood for another 25 basis point rate cut on December 10. This market is currently pricing in a 57% probability for at least 75 basis points worth of rate cuts for calendar 2026.
My Feeling
Though the market is reacting poorly at first, the direction of policy has changed. This likely results in a softer U.S. dollar and, going forward, higher equity prices. In my humble opinion, any market weakness over the next few days related to this outcome is an opportunity to add to long positions. Especially in growth stocks.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
