Impressions of the Fed's December rate cut and Chair Powell's remarks

Although the committee vote was 9 to 3 — outwardly a sign of dissension in the ranks — Mr. Powell did a skillful job framing the split vote as stemming from differing views on inflation and unemployment.

In fact, Powell noted that all policymakers agreed inflation remained too high and labor markets were too weak. The differences, he explained, centered on how Fed governors preferred to adjust policy in response to these evolving risks.

With regard to the vote, only one committee member  favored a 50-basis-point cut (Stephen Miran, Mr. Trump’s recent pick), presumably to counter a weakening economy.

Two others (Austan D. Goolsbee and Jeffrey R. Schmid) voted to keep rates on hold to guard against inflation that has yet to return to target. And although the remaining nine members voted for cut, nothing in Mr. Powell’s comments suggested they viewed this as a “one and done” move.

Instead, Powell emphasized that the Fed will examine a substantial amount of data between now and the next meeting before deciding on further adjustments.

Labor market conditions

When asked about the condition of the US labor market, Powell reiterated that there has been virtually no job growth so far this year and that jobs have actually been lost since the spring after revisions were incorporated.

However, unemployment has risen only modestly because labor supply has contracted alongside the slowdown in hiring. This is also why there has not been a meaningful surge in unemployment claims.

Powell stressed that the central bank does not want to contribute to further negative job creation — another key reason why the majority of the committee supported a rate cut. 

Powell noted that while AI is having some impact on the labor markets, the number of jobs actually being shed due to AI remains relatively small. (In earlier commentary, we pointed out that outplacement firm Challenger estimated only about 55,000 jobs have been lost to AI so far this year).

Inflation pressures and housing market constraints

On inflation, Powell said it was unclear whether tariff-induced price pressures will prove to be a one-off phenomenon or become ingrained, contributing to progressively higher prices over time. He added that in the goods category, roughly half the price increase was attributable to tariffs, as these items are mostly imported.

Housing remains a problem area for the economy. An NBC reporter noted that the average age of a first-time US homebuyer is now 40.

Powell acknowledged the affordability challenge, explaining that housing supply remains restrained, borrowing costs are still too too high, and large parts of the market – both supply and demand – remain because homeowners are locked into low-rate mortgages that cannot be replicated. As a result, many are effectively stuck in their existing homes.

Disconnect between Fed cuts and bond yields

Another reporter pointed out that the bond market has not kept pace with the Fed’s rate reductions, with yields now higher than they were when the Fed began cutting in September.

Powell responded that bond investors may be anticipating stronger growth and/or higher inflation ahead, which could explain why yields have not fallen in step with policy rates.

This was not a particularly reassuring answer, as it underpins a disconnect between Fed policy and credit-market concerns about the outlook.

Housing has been particularly affected by this gap, as mortgage rates have only partially tracked the Fed’s downward trajectory.

Productivity outlook

One positive Powell highlighted is that productivity gains remain solid, helping contain inflation while supporting higher real incomes.

He emphasized that productivity improvements were occurring even before the advent of AI, so this recent uptrend cannot be solely attributed to technological effects.

Powell’s tenure and policy priorities

Powell also gave no indication he plans to resign before his term ends in May, nor did he say whether he intends to remain on the Board afterward.

For now, he said he is focused on handing off an economy with low inflation and stable employment to his successor. As a result, we do not expect a “shadow chancellor” scenario to emerge if Mr. Trump chooses to announce a nominee early.

Market reaction

In terms of market reaction, commodity markets moved higher.

High-grade Comex copper prices ended the session up nearly 8¢/lb, implying at the time that Lonon Metal Exchange (LME) prices could rise by an additional $100 per metric ton on Thursday to keep the prevailing arbitrage intact. Instead, LME prices rose by nearly $300 per metric ton this morning, hitting a new record high of $11,800 per metric ton.

Gold and silver prices also strengthened late yesterday, and that momentum carried into midday trading on December 11 – particularly for silver – as the US dollar index slipped about half a point yesterday and fell by a similar margin again early today.

The dollar’s weakness reflects expectations that further Fed rate cuts remain possible. These conceivably occur just as the European Central Bank and the Bank of Japan may be preparing to raise rates.

Equity market performance

US equity markets had been trading lower when Mr. Powell began speaking, but investors grew more optimistic as his remarks continued. By the close, the Dow finished almost 500 points higher, and gains expanded further today, with the index hovering around a 600-point increase by midday.

The S&P 500 and NASDAQ ended up by 46 and 77 points yesterday, respectively. That said, the S&P 500 was fairly flat during Thursday trading, while the NASDAQ had erased yesterday’s gains and more, trading roughly 140 points by midday.

For the moment, the tone remains constructive, driven by a weaker dollar and a relatively dovish Fed. What the remainder of the month brings, however, remains to be seen.