Yields decline as Fed delivers 25 bp rate cut. Treasury yields gradually declined ahead of today’s FOMC meeting, where the Fed delivered a 25 bp rate cut as anticipated. Volatility spiked in the FOMC meeting aftermath, as yields initially declined and then rose 3-5 bps before dropping ~6 bps to intraday lows. The increase in volatility was largely fueled by three dissents, the Fed’s plan to buy $40B in Treasury bills over the next month, and Powell’s (generally) neutral press conference. The 2-year yield closed 8 bps lower at 3.54%, while the 10-year yield closed 4 bps lower at 4.15%. Meanwhile, equities climbed today, with the S&P 500 and NASDAQ up 0.67% and 0.33%, respectively.
Fed makes third consecutive quarter point cut despite three dissents. The December FOMC meeting concluded today, with committee members voting 9-3 in favor of cutting interest rates by 25 bps to a new target range of 3.5% – 3.75%. Today’s vote was the first since 2019 with three dissents, as Chicago Fed President Goolsbee and Kansas City Fed President Schmid voted in favor of holding rates. Governor Miran dissented in favor of a half point reduction in rates, as he also did at the October meeting. There has not been a unanimous policy vote since June, emphasizing the divided outlook among Fed members. This divide underscores the impact of conflicting labor and inflation data in recent weeks, as well as data that have been delayed or cancelled due to the government shutdown. The Fed also announced that they have authorized new purchases of short-term treasury securities with the goal of maintaining an “ample” supply of bank reserves. The full FOMC statement with a side-by-side comparison from the last meeting can be read here.
Powell provides no clear hint about future policy decisions. Following today’s decision to cut policy rates by 25 bps, Fed Chair Powell said it was a “close call,” and that he “could make a case for either side.” Elaborating on the committee’s decision, he said, “This further normalization of our policy stance should help stabilize the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariffs have passed through.” When asked if the next policy decision would be a rate cut, Powell did not answer directly but highlighted that no Fed official sees a rate hike as their base-case policy outlook. Futures markets are currently fully pricing in 2 more rate cuts next year.
