As we discussed yesterday, we have a lineup of Fed speakers this week, and they are clearly trying to prepare markets for the possibility of "no cut" at the December 18th meeting.
Fed Governor Chris Waller gave a speech yesterday titled, "Cut or Skip?".
This is the same guy, after the 75 basis point cut in September, who said he would support "big rate cuts" if needed. Just two and half months ago, he said he's fine moving in 50s to get to "where they want to go."
Now he's considering no cut.
Today we heard from a few more Fed members.
The San Francisco Fed President said a rate cut [in December] is "not off the table."
Keep in mind, the market is pricing in a better than 70% chance of a quarter point cut coming this month.
Let's revisit the reason for that level of confidence in the chart below …
As you can see, the Fed's favored inflation gauge, PCE, is very near its 2% target (the red line).
And yet the gap between inflation (the blue line) and where the Fed has set the Fed Funds rate (the orange line) is still very wide.
So, after 75 basis points of rate cuts, the "real rate" (Fed Funds rate minus inflation) is still at historically high levels. That means policy remains restrictive (i.e. its putting downward pressure on the economy). The Fed still has its foot on the brake, with plenty of pressure.
So why is the Fed setting expectations for a potential pause in the policy path?
Fed Governor Kugler said today, what the Fed Chair (Jerome Powell) would prefer not to say out loud. She said, trade policy under the incoming administration may affect prices.
We'll see if Jerome Powell tries to moderate the market's rate expectations tomorrow. He's on the schedule for a discussion at the New York Times DealBook Summit.