The Final Interest Rate Cut…For Now
- The Federal Reserve closed the year with a widely expected third consecutive rate cut, lowering the federal funds target range to 3.50%–3.75%. Markets had effectively priced in the move before the meeting began with interest-rate futures implying roughly a 90% probability of a reduction. In the post meeting press conference, Chair Powell reiterated the Fed’s commitment to maximizing employment and maintaining price stability, but he emphasized that lingering inflation pressures are beginning to weigh more heavily on the committee’s deliberations. While policymakers intend to pause additional rate cuts for now – with projections showing only one potential reduction in 2026 – they also announced the central bank’s resumption of balance-sheet expansion. Beginning this month, the Fed will purchase $40 billion in Treasury bills, providing incremental liquidity that should help further stabilize markets.
- Meanwhile, economic signals are proving increasingly uneven. The Conference Board’s Leading Economic Index declined 0.3% in September to 98.3, matching August’s drop and extending its downward trend. More importantly, the six-month rate of change has deteriorated: the index is now down 2.1% over the latest period compared with a 1.3% decline in the previous interval. The accelerating contraction suggests weaker forward momentum and a rising probability of recession. Historically, sustained negative readings of this magnitude have preceded broader slowdowns, even when coincident measures appear relatively firm.
- Labor-market data delivered a similar message of resilience with emerging softness. October’s JOLTS report showed a slight increase in layoffs to 1.2%, though hiring held steady at 3.2% and job openings rose by more than 400,000—evidence that employer demand remains intact. At the same time, the continued decline in the quit rate to 1.8% reflects waning worker confidence and reduced willingness to pursue better opportunities. Because the quit rate closely tracks wage bargaining power, its downward trend may signal easing wage pressures ahead. Together, these indicators portray an economy that remains functional but is gradually losing momentum as policy, inflation, and cyclical headwinds converge.