Economic Commentary

Executive summary

As widely expected, the Federal Reserve (Fed) policymakers lowered the federal funds rate by 25 basis points (0.25%) to a range of 4.50% – 4.75%. Meanwhile, the committee left the pace of their balance sheet runoff unchanged at $60 billion per month. 

During the post-meeting press conference, Chair Jerome Powell stayed on script, including reading several scripted answers. More importantly, he gave himself a significant amount of optionality whether to cut or pause at the December meeting and the pace of cuts in 2025. We view that as the appropriate tact at this time.

With the post-election jump in both the U.S. stock market and bond yields this week, and the Fed aligning with expectations, the market reaction was relatively muted after the Fed meeting. 

Lastly, while there are no Fed personnel changes scheduled before 2026, it’s likely that wholesale leadership transformation is coming over the next several years. 

What happened

At its November rate-setting meeting, the Federal Open Market Committee (FOMC) unanimously agreed to lower its target range for the federal funds rate by 25 basis points (0.25%) to 4.50% – 4.75%. This is the second rate cut in as many meetings, which now puts it 0.75% lower than where it peaked during this cycle.

The pace of its balance sheet runoff (i.e., quantitative tightening, or QT) remained unchanged at $60 billion per month with the monthly redemption cap of $25 billion for Treasury securities and agency mortgage‑backed securities (MBS) set at $35 billion.

During the post-meeting press conference, Chair Powell acknowledged the slowdown in the labor market; notably, lower monthly job growth over the last three months. However, he also offset those concerns with a generally upbeat view of cooling inflation. Yet, Powell also noted that interest rates remain restrictive currently and need to decrease further, although the pace is unknown at this point.

Powell quickly swatted away questions regarding possible fiscal policy changes by the incoming administration – saying that the Fed isn’t going to comment on fiscal policy nor the election. That said, Powell bristled when directly asked about whether he’d step down as Fed Chair if asked by the president, simply saying, “no.” When repeatedly pressed regarding the legality of being replaced as Fed Chair or demoted, he flatly stated that it’s “not permitted under the law.”

Our take

Today’s rate-setting decision was straightforward, but the next few meetings won’t likely be so easy. Chair Powell gave himself a good amount of optionality for December, whether to cut or pause.

Alas, the Fed can’t base its decisions on campaign rhetoric. Thus, it must await the reality of what actual policies are enacted and their resultant impact. Furthermore, the makeup of the U.S. House isn’t settled, with 36 yet-to-be called races that could tip the majority either way. That will greatly determine the timing and magnitude of any fiscal policy changes. In other words, it’s too early for the Fed to formulate monetary policy around undetermined changes.

That said, we believe that markets will remain laser-focused on inflation; more specifically, inflation expectations. In fact, as the last few weeks have shown, there may be a rebirth of the “bond vigilante” mentality, where investors demand greater yields (i.e., higher compensation) for increasing policy uncertainty that may result in stickier inflation, heavier debt issuance, or greater budget deficits.

Importantly, the uncertainty regarding political changes in Washington muddies the water for potential outcomes in 2025 and beyond, let alone the Fed’s potential reaction. The Fed’s pacing will be continually reassessed meeting by meeting. Previously we envisioned a gradual glidepath lower and had penciled in quarterly point rate cuts through 2025. Post-election the probability of a slower pace of rate cuts has risen; however, it will take time for the new administration to implement policy changes and for their impacts to emerge.

Suffice it to say, while the exact point of the neutral rate is debatable, the current level of interest rates remains restrictive for economic growth and should be lowered further. Yet, given the ambiguity for the pace of both inflation and growth, the number of cuts is harder to forecast and, like the Fed, will require a data-dependent approach.

Bond market reaction

To some degree, the bond market’s reaction to the decisive election results overshadowed the trading activity around today’s rate decision. Since mid-September, U.S. Treasury yields have risen rapidly as the perceived odds of a Republican sweep increased. Traders recalibrated for potentially higher growth, stickier inflation, greater fiscal policy uncertainty, and the possibility of a more gradual Fed rate cut path. Over the past 7 weeks, the 2- and 10-year U.S. Treasury yields have risen roughly 70 basis points (0.70%) to 4.21% and 4.34%, respectively.

In the hours ahead of the Fed rate decision, U.S. Treasury yields declined, paring their abrupt spike during Wednesday’s trading session. Once the rate cut was officially announced, core fixed income held firmly to those early price gains and showed little immediate reaction. Throughout his subsequent press conference, Chair Powell’s comments were largely in line with the market’s (and our) expectations; more specifically, that monetary policy is not on a pre-determined path, the Fed will respond to incoming data as it arrives, and policymakers cannot and will not craft their decisions based on the nebulous economic impacts of the election. Thus, bond market fluctuations remained relatively muted while the Fed Chair was behind the podium.

Interest rate volatility just touched its highest point in more than a year. We expect rate volatility to remain elevated as traders speculate on the ultimate impact of this week’s shake-up in Washington. At present, the 10-year U.S. Treasury yield is testing the upper end of our fair value assessment and sits near oversold territory from a technical price perspective. If yields resume their recent march higher, it may create an opportunity to add duration (i.e., longer-dated fixed income) within fixed income portfolios. For now, we maintain our neutral duration posture. Additionally, in the very near term, the 10-year yield will likely struggle to fall below roughly 3.7% absent more significant deterioration in the labor market.

Lastly, investment grade (IG) credit spreads – the difference between IG corporate bond yields and like-maturity U.S. Treasury yields – are flirting with their lowest level since the late 1990’s. High yield credit spreads sit near their lowest level since 2007. For new investments, we reiterate our up-in-quality bias within fixed income allocations until spreads rise to reflect restrictive Fed policy and a near-term moderation in economic activity.

Bottom line

The Fed cut rates again, this time by a quarter point (0.25%). Chair Powell gave the Fed a significant amount of optionality whether to cut or pause at the December meeting and perhaps adjusting the pace of cuts in 2025. We view that as the appropriate tact at this time.

Fed structure: No personnel changes scheduled before 2026, but wholesale leadership transformation coming

Much like the Supreme Court, there’s a tension and gamesmanship between administrations to get “their people” into key leadership positions, but the timing of departures, the length of terms, and the mechanics of the Senate consent process tends to dictate the outcome.

Barring a voluntary exit or an unforeseen issue, such as health or the like, there are no term expirations scheduled prior to 2026 for key personnel at the Federal Reserve. However, wholesale leadership changes are likely at some point in the next two years.

Starting at the top, Chair Powell was reappointed in 2022 and his term as chair ends on May 15, 2026. We don't expect Powell to be reappointed by President-elect Trump. In the meantime, while the law isn't entirely clear, it's believed that a president cannot replace the Fed Chair or other Board members without cause. To remove a member of the Board of Governors requires “inefficiency, neglect of duty, or malfeasance in office.” Of course, that doesn’t prevent Trump from attempting to remove Powell (or another Fed Governor) if he wishes. It's also possible that Powell could step aside (aka retire); he'll be 73 in 2026.

But here's where it gets a bit confusing – Powell holds three distinct positions. First, he is a member of the Board of Governors through January 2028, a post appointed by the president and confirmed by the Senate. Secondly, he is chair of the Board of Governors, which is separately appointed by the president and confirmed by the Senate; that term ends May 2026.

Thirdly, Powell is also the chair of the Federal Open Market Committee (FOMC) – the rate-setting committee – by vote of the FOMC members. Technically, it wouldn't matter if Powell was replaced as Fed Chair insofar as policy changes are based on majority votes (i.e., a new Fed chair would still only have one vote). Moreover, Powell could potentially remain in place since his term as a member of the Board of Governors ends in 2028, although that would be unprecedented.

Practically speaking, though, a change in Fed leadership would alter the tone and tenor of monetary policy, especially in the new era of post-Fed meeting press conferences, bi-annual Congressional testimony, etc. Similarly, the other leadership terms begin rolling off in mid-2026. The term of Vice Chair for Supervision Michael Barr ends in July 2026, while Vice Chair Philip Jefferson’s term ends September 2027. Yet, their underlying terms on the Board of Governors won’t end until 2032 and 2036, respectively. As with Powell, we don’t foresee either staying beyond the term of their leadership role or being reappointed.

Additionally, the soonest scheduled Board of Governors term expiration is January 2026 for Governor Adriana Kugler. While eligible to be reappointed, that’s unlikely as she was appointed by President Biden.

The next soonest term ends in January 2030 for Governor Christopher Waller, who was a Trump appointee in December 2020 for the balance of an unexpired term. Trump has praised Waller and he's reportedly on Trump's short list for potential Fed Chair replacements, along with former Fed Governor Kevin Warsh and Kevin Hassett, who was Chairman of the Council of Economic Advisers for Trump.

The 12 regional Fed presidents, however, are appointed by each district’s private sector boards of directors, subject to the approval of the Fed Board in Washington. Of those, Philadelphia Fed President Patrick Harker is subject to the Fed’s mandatory retirement rules in June 2025. Regardless, President Harker will not be a voter in 2025 under the FOMC’s voting rotation.

The next mandatory retirements would arrive in 2028 – Richmond Fed President Thomas Barkin (January 2028), followed by New York Fed President and FOMC Vice Chair John Williams (June 2028) and San Francisco Fed President Mary Daly (October 2028). While it seems likely that the Fed will look very different at the end of President-elect Trump’s second term, we expect these changes to largely coincide with scheduled term expirations.