"I'll sing you a song about pigeons"—December FOMC Commentary + Press Conference Summary

One-sentence commentary：The 25bps rate cut itself was in line with expectations, but the dot plot and press conference information were more dovish than the market expected. This dovishness is reflected in three aspects. First, the "hawkish dot plot" that the market was worried about (such as no rate cut in 2026) did not appear. The dot plot significantly raised the economic growth forecast for 2026-2027, lowered the inflation forecast, and maintained the expectation of one rate cut per year, presenting a Goldilocks scenario. Second, the press conference was more dovish than expected. Powell seemed to return to the Jackson Hole meeting in August, repeatedly emphasizing the risks of a deteriorating job market and downplaying the risks of rising inflation. Third, the technical balance sheet expansion (RMP) began on December 12, with an initial purchase amount of $40 billion per month, both the amount and the timing slightly exceeding expectations. I. Five Comments on the FOMC's Statement 1. Reasons and Disagreements Regarding the 25bps Rate Cut? During the press conference, Powell clearly stated that the softening of the job market and the "as expected" decline in inflation were the reasons for a further 25bps rate cut (rather than waiting until January next year) in the absence of sufficient data. However, disagreements also increased further. Compared to the two dissenting votes in September (Miran suggested a 50bps rate cut, Schmid suggested no rate cut), this meeting saw three dissenting votes. Miran supported a 50bps cut, while Schmid and Goolsbee suggested no rate cut. Notably, this meeting also saw four "soft dissenting" votes, meaning those who predicted only two rate cuts in 2025 (equivalent to no rate cut this month) but did not reflect this in their votes. These may include those who previously made hawkish statements but are not members of the 2025 voting committee (such as Logan and Kashkari), or members of the voting committee who voted in favor of a rate cut even though the dot plot did not support it (such as Collins and Musalem). 2. Future Rate Cut Path? On the one hand, the statement (as expected) signaled a "wait and see, no rate cuts for now" approach early next year. The statement changed the condition for adjusting the future interest rate path from "In assessing the appropriate stance of monetary policy" to "In considering the extent and timing of additional adjustments to the target range for the federal funds rate." This change in wording also appeared at the December FOMC meeting last year, usually implying a wait-and-see approach in the short term. However, considering the market's expectation of only two rate cuts in 2026, the Fed's signal to pause rate cuts early next year is not surprising. On the other hand, the dot plot still maintains the expectation of one rate cut in both 2026 and 2027. Previously, the market worried that due to a more optimistic GDP outlook and a recent general recovery in upstream commodity prices, coupled with divergent opinions within the FOMC, the Federal Reserve might adjust its expectation of zero rate cuts in 2026. What signals does the dot plot convey? Maintaining the rate-cutting path, revising GDP forecasts upward and inflation forecasts downward, it paints a very "Goldilocks" picture (better growth, lower inflation, and gradual rate cuts). The overall signal is neutral, but slightly dovish compared to the market's previous hawkish expectations. Specific details: 1) Interest rate cuts were maintained once each in 2026 and 2027, consistent with the September SEP. 2) The 2026 GDP forecast was raised by 0.5 percentage points to 2.3%. Powell stated at the press conference that this was due to more optimistic expectations for productivity, consumption, and investment activities. 3) The 2026 PCE and Core PCE inflation forecasts were lowered by 0.2 percentage points and 0.1 percentage points to 2.4% and 2.5%, respectively, but the unemployment rate forecast remained unchanged. 4) Dovish signals from the press conference? 1) Powell explicitly stated that "the next step is not to raise interest rates" (when answering Nick's question). 2) Regarding employment, Powell explicitly stated that the employment data was weak and overestimated (specifically referring to the QCEW annual revision). Throughout the press conference, Powell repeatedly stated that "job growth is actually negative," emphasizing the risk of non-linear deterioration. 3) On inflation, Powell reiterated that it is not a problem under the baseline scenario, that tariffs are one-off, and that a weak job market means that service sector inflation is unlikely to rebound. ("Increasing evidence suggests that service sector inflation is declining" and "goods inflation is entirely concentrated in tariffed sectors"). Overall, Powell seems to have returned to the Jackson Hole meeting at the end of August, reiterating his "employment risk theory," which is good news for investors who have been somewhat nervous recently. 5. How to understand Reserve Management-Based Balance Sheet Expansion (RMP)? Although it also involves buying bonds, unlike quantitative easing (QE), RMP aims to ensure that the size of reserves is commensurate with the natural growth of the banking system's size (demand), thus the pace of purchase is relatively gradual. The FOMC announced that it will begin purchasing $40 billion worth of goods starting December 12th, and may maintain a relatively high pace in the short term, but the pace will gradually slow down (based on Powell's statements, the central level is expected to be around $20-25 billion per month). There are two background reasons for this: 1) Since October, liquidity pressure in the repo market has persisted (SRF usage has consistently been above 0 and the SOFR-ONRRP spread has consistently been above 15bps). Therefore, the Fed believes that the current reserve level has met the "ample" standard for balance sheet reduction and can begin the next phase of natural balance sheet expansion. 2) The FOMC believes that the significant increase in TGA during the tax payment season in April next year will lead to a large amount of reserve withdrawals, and therefore, it has proactively released liquidity in advance. From a technical perspective, besides the slightly faster-than-expected speed and timing of the purchases, this RMP also allows the purchase of short-term coupons with maturities of 1-3 years. This is a double benefit for the short end. II. Press Conference Transcript 1. Howard Schneider (Reuters): First, regarding the statement, to clarify that we have a consistent understanding. Inserting the phrase "considering the magnitude and timing of additional adjustments," does it indicate that the Federal Reserve is currently on hold, until clearer signals emerge regarding inflation, employment, or economic developments? Powell: Yes, the adjustments since September have brought our policy within a broad range of estimates of the neutral rate. As we noted in today's statement, we are well-positioned to determine the magnitude and timing of any further adjustments based on incoming data, the evolving outlook, and the balance of risks. This new wording indicates that we will carefully assess the incoming data. Furthermore, I would like to point out that we have lowered the policy rate by 75 basis points since September and by 175 basis points since last September. The federal funds rate is now within a broad range of estimates of its neutral value, and we are well-positioned to wait and see how the economy evolves. Howard Schneider (Reuters - Follow-up): If I may follow up on the outlook, it seems quite optimistic for next year, with rising GDP growth, coupled with easing inflation and a fairly stable unemployment rate. What has led to this? Is it an early bet on AI? Is there some sense of increased productivity? What is driving all of this? Powell: There are many factors driving the forecasts. If you look broadly at external forecasts, you'll also see a rebound in growth in many projections. Part of the reason is that consumer spending has remained resilient; on the other hand, AI-related data center spending has been supporting business investment. Overall, the baseline expectation from the Fed and external forecasters is that growth next year will rebound from the current relatively low 1.7%. I mentioned that the median SEP growth this year is 1.7% and next year is 2.3%. In fact, part of that is due to the government shutdown. You can take 0.2 percentage points from 2026 and carry it over to 2025. So it should actually be 1.9% and 2.1%. But overall, yes, fiscal policy will be supportive, as I mentioned, AI spending will continue. Consumers continue to spend. So it looks like the baseline for next year is solid growth. 2. Steve (CNBC): Thank you, Mr. Chairman. You previously used a risk management framework to describe the rate cut. To follow up on Howard's question, has the risk management phase of the rate cuts ended? Given the employment data we may have next week, have you taken sufficient "insurance" against potential weakness? Powell: We will have a lot of data between now and the January meeting, and that will be taken into consideration. If you look back, we kept the policy rate at 5.4% for over a year because inflation was very high and the labor market was very robust. Last summer (summer of 2024), inflation declined, and the labor market began to show real signs of weakness. So we decided, as our framework tells us, that when the risks to both objectives become more equal, you should shift from favoring one of them (which was inflation at the time) to a more balanced, more neutral stance. So we did. We cut rates a few times, then paused for a while to see what happened in the middle of the year, and then resumed cutting rates in September. We've now cut rates by a total of 175 basis points. As I mentioned, we feel our current positioning puts us in a good position to wait and see how the economy evolves from here. Steve (CNBC - Follow-up Question): If I may follow up on SEP, you're predicting a significant increase in growth numbers, but the unemployment rate hasn't fallen significantly. Is there an AI factor involved? What's the driving force behind achieving more growth without a significant drop in unemployment? Powell: This means higher productivity. Part of that could be AI. I also believe that productivity has been structurally higher over the past few years. If you start to think of it as 2% per year, you can maintain higher growth without creating more jobs. Of course, higher productivity is also a reason why incomes increase over a longer period. So it's basically a good thing, but that's what it means. 3. Colby Smith (The New York Times): Today's decision was clearly very divided. Not only were there two formal dissenters against the rate cut, but also four "soft" dissenters. I wonder if this reluctance of several members to support a near-term rate cut indicates that the threshold for a near-term rate cut is much higher? If things are currently going well, what exactly would the committee need to see to support a rate cut in January? Powell: As I mentioned before, the situation is that our two objectives are somewhat under tension. Interestingly, everyone at the FOMC table agrees that inflation is too high and we want it to come down; at the same time, everyone agrees that the labor market is already weak and there are further risks. Everyone agrees on that. The disagreement lies in how to weigh those risks, what your projections look like, and where you think the bigger risks ultimately lie. Having this kind of persistent tension between objectives is very rare, and when you encounter this situation, you see what we are in now. This is actually what you would expect to see. At the same time, our discussions were very thoughtful and mutually respectful. There were strong opinions, and we came together to reach a place where we could make decisions. We made a decision today. Nine out of twelve people supported it, so the support was quite broad. But this is not like a normal situation where everyone agrees on the direction and approach. Opinions are more divided this time, which I think is simply inherent to the situation. As for the conditions needed, we all have our own outlooks for the future. But I think ultimately, now that we've cut rates by 75 basis points, and the effects of those cuts are only just beginning to appear, we're in a good position to wait. We will have a lot of data. Speaking of data, we need to assess it carefully, especially the household survey data. Due to very technical reasons (the way the data is collected), this data can be distorted, not just volatile, but warped. This is because no data was collected for half of October and November. So we need to look at it carefully, with a skeptical eye. Nevertheless, by the January meeting we will have a lot of December data. Colby Smith (The New York Times - Follow-up): Regarding the dissent, given the complexity of our economic situation, is there a point in time when these dissents could become counterproductive, whether in communication with the Federal Reserve or in conveying information about the future policy path? Powell: I don't think we've reached that point. I will say again that these are good, thoughtful, and mutually respectful discussions. You'll hear many people, including outside analysts, say the same thing: "I can defend either side." It's a balanced assessment. We have to make a decision. In the current situation, if you look at the SEP (Standardized Economic Policy), you'll find many people agree that the risks to unemployment are tilted to the upside, and the risks to inflation are also tilted to the upside. So what do you do? You only have one tool; you can't do two things at once. So, at what speed? On what scale? This is a very challenging situation. I think we're in a good position to wait and see how the economy evolves. 4. Nick Timiraos (Wall Street Journal): There has been some discussion recently about the 1990s. In the 1990s, the Committee implemented two separate sequences of rate cuts, each by 75 basis points (1995-96 and 1998). After those two, the next move for interest rates was an increase, not a decrease. With policy now closer to neutral, is the next move for interest rates necessarily a decrease? Or should we consider policy risks to be truly two-way from now on? Powell: I don't think raising rates is anyone's base case right now. I haven't heard that said. What you see is some people thinking we should stop here, that we're in the right place and just need to wait. Some people thinking we should cut rates once or more this year and next. But when people write policy estimates, it's either staying here, or cutting rates a little, or cutting rates a bit more. I don't think the base case includes raising rates. You're right, those two in the 90s did indeed turn around after three rate cuts. Nick Timiraos (Wall Street Journal - Follow-up Question): If I may follow up, the unemployment rate has been rising very slowly for most of the past two years, and today's statement no longer describes it as "remaining low." What makes you confident that it won't continue to rise in 2026, especially considering that housing and other interest rate-sensitive sectors still seem to feel constrained by policy? Powell: I think the current thinking is that, having already cut rates by 75 basis points, policy is within a reasonable range of the neutral interest rate, which will stabilize the labor market, or at most rise by one or two percentage points, but we won't see any sharp decline; we see absolutely no evidence of that at present. Meanwhile, policy remains far from accommodative. We feel we've made progress this year on non-tariff-related inflation. The effects of tariffs will become apparent next year. But as I said, we're in a good position to wait and see how things unfold. 5. Claire Jones (Financial Times): Many people interpret your comments at the October meeting—"When things are unclear, we slow down"—as meaning there won't be a rate cut now, but rather in January. So I'm curious why the committee decided to act today instead of waiting until January? Powell: I said in October that there was no certainty of action, and that was indeed true. Why did we act today? I'll point out a few things. First, the gradual cooling of the labor market continues. The unemployment rate rose 0.3 percentage points from June to September. Since April, employment has increased by an average of 40,000 per month. We believe these figures are overstated by about 60,000, so the actual figure is likely a decrease of 20,000 per month. Furthermore, surveys of households and businesses show a decline in both supply and demand for workers. Therefore, the labor market continues to cool gradually, perhaps a little faster than we anticipated. Regarding inflation, the data is slightly lower. There is increasing evidence that service sector inflation is declining, but this is being offset by rising commodity prices, and commodity inflation is entirely concentrated in tariff-exclusive sectors. Currently, more than half of the excess inflation is coming from goods, i.e., tariffs. We must ask, what are our expectations for tariffs? To some extent, this depends on whether we see a broader economic overheating. We see wage growth reports that do not indicate the kind of overheated economy that would produce “Phillips curve” inflation. Taking all these factors into account, we have made this judgment. Claire Jones (Financial Times - Follow-up Question): Regarding reserves, how worried are people about some of the tensions we've seen in the money markets? Powell: I wouldn't say "worried." The reality is, balance sheet reduction (QT) has been ongoing. The overnight reverse repo facility (ON RRP) fell to almost zero. Then, starting in September, the federal funds rate began to rise within a range, almost reaching the interest rate on outstanding reserves (IORB). This is not a problem. It tells us that we are actually in a well-preserved system. We knew this would come. When it finally arrived, it was a little faster than expected, but we were absolutely prepared to take the actions we've been talking about. Those actions are what we're announcing today: resuming reserve management purchases. This is completely separate from monetary policy; it's simply that we need to maintain an ample supply of reserves. Why such a large amount ($40 billion)? Because April 15th (tax day) is approaching. People pay a lot of money to the government, and reserves will drop sharply and temporarily. This seasonal accumulation will happen anyway. Furthermore, the long-term sustained growth of our balance sheet requires us to add about $20-25 billion per month. So this is just preparation for the tax period in mid-April. 6. Andrew: This is the last FOMC press conference before the important Supreme Court hearing next month. Can you talk about how you hope the Supreme Court will rule? I'm curious why the Fed has been so silent on this crucial issue. Powell: Andrew, that's not something I want to discuss here. We are not legal commentators. We believe that participating in this as a public discussion is not helpful in court proceedings. Andrew (follow-up question): Then let me ask another question (Mulligan). I want to go back to a question from the 1990s. Do you think that's a useful model for thinking about the current economic situation? Powell: I don't think it's gone up to that level. It's such a unique situation, not like the 1970s, but there is indeed tension between our two goals. This was unique during my time at the Fed. Our framework says that when this happens, we take a balanced approach. It's a very subjective analysis. It basically tells you that when both goals are equally threatened, you should remain somewhat neutral. We've been moving toward neutrality. We're currently in the neutral range, or rather, at the high end of the neutral range. We've happened to cut rates three times. We haven't made any decisions regarding January yet. 7. Edward Lawrence (Fox Business News): I'd like to ask about the decline in inflation expectations in the SEP report. Do you think the tariff price increases will be fully transmitted within the next three months? Is it a six-month process? Because of this, is employment a threat to the economy? Powell: Regarding tariff inflation, first the tariffs are announced, then they take effect, and then it takes several months. Goods may need to be shipped, and it can take a considerable amount of time for a single tariff to fully take effect. But once the impact is felt, the problem is, isn't this just a one-off price increase? If we assume no new major tariffs are announced, commodity inflation should peak around the first quarter of next year. It shouldn't be very high after that. If there are no new tariffs after that, then we should start to see inflation decline in the second half of next year. Edward Lawrence (follow-up question): I want to ask the elephant in the room (an obvious question). The president has publicly discussed the new Federal Reserve chairman nominee. Has this hindered your current work or changed your mind? Powell: No. 8. Michael McKee (Bloomberg): The 10-year yield is 50 basis points higher than when you started cutting rates in September 2024, and the yield curve is basically steepening. Why do you think that continuing to cut rates in the absence of data will lower the yield that has the greatest impact on the economy? Powell: We are focused on the real economy. When long-term bonds fluctuate, you have to look at the reasons. If you look at inflation compensation (break-even inflation), they are at a very comfortable level, consistent with 2% inflation. So the rise in interest rates is not due to concerns about long-term inflation. That must be due to other reasons, such as expectations of higher growth. We also saw significant fluctuations at the end of last year, but that had nothing to do with us; it was caused by other developments. Michael McKee (follow-up question): You mentioned that the public expects you to return to 2%, but the vast majority of Americans list high prices and inflation as their primary concern. Can you explain to them why you prioritize the labor market (which seems relatively stable to most people) rather than their primary concern—inflation? Powell: We hear clearly through our extensive network that people are experiencing high costs. These are actually high costs, many of them not from the current inflation rate, but from the embedded high costs of high inflation in 2022 and 2023. The best thing we can do is get inflation back to our 2% target while having a strong economy that allows real wages to rise. We need a few years for nominal wages to rise above inflation so people can start feeling good about affordability. We are working to control inflation while also supporting the labor market and strong wages. 9. Victoria (Politico): This is the third rate cut this year, with inflation around 3%. Is the message you're trying to convey that you're comfortable with the current level of inflation, as long as people understand you still want to get back to 2%? Powell: Everyone should understand that we are also committed to achieving 2% inflation. But this is a complex, unusual, and difficult situation. The labor market is under pressure, and job creation may actually be negative. Labor supply has also declined significantly. This is a labor market that appears to have significant downside risks. People are very concerned about this. The current inflation story is that, if you remove tariffs, inflation is just over 2%. So it is indeed tariffs that have caused most of the inflation overshoot. We believe this is a one-off event. Our job is to make sure it is a one-off event. If it were just high inflation and a very strong labor market, interest rates would be even higher. But right now we face risks on both sides. 10. Elizabeth Schulze (ABC News): Following up, you've consistently stated that job growth is negative. Why do you believe job growth is much worse than official data suggests? Powell: Real-time job growth is very difficult to estimate. They can't count everyone. There has always been a systemic overestimation. They correct it twice a year. Last time it was corrected, we thought it would be corrected by 800,000 or 900,000, and that's exactly what happened. We believe this overestimation continues and will be corrected. We believe it's overestimated by about 60,000 per month. So a 40,000 job increase could actually be a negative 20,000. But this is also, to some extent, a result of a significant drop in labor supply. If there's no increase in the number of workers in a world, you really don't need many jobs to achieve full employment. But I think in a world with negative job creation, we need to look very carefully to make sure that policies aren't suppressing job creation. Elizabeth Schulze (follow-up question): Regarding supply, we're seeing large employers like Amazon laying off workers because of AI. To what extent do you now factor in the weakness in the job market due to the AI ​​factor? Powell: That might be part of the story, but not the majority. If there were truly massive layoffs, you would expect a rise in continuing jobless claims and new claims. But that hasn't happened. That's a bit strange. In the long run, AI may increase productivity and create new jobs. But it's still in the early stages, and we haven't seen much of that reflected in the layoff data yet. 11. Enda Curran (Bloomberg): Given the broad range of opinions within the Policy Committee, why is there such a large divergence of views between the Reserve Bank president and members of the Board of Governors? Powell: Not so clear-cut. Opinions are also quite diverse within each group. I don't think this is a clash between two camps. Enda Curran (follow-up question): If the Supreme Court overturns the tariffs currently being considered, what economic impact will that have on growth and inflation? Powell: I really don't know. It depends on a lot of things we don't know. 12. Christine Romans (NBC News): I want to ask about the K-shaped economy. High-income households, supported by home equity and stock market wealth, are driving spending; but low-income consumers are struggling due to five years of rising prices. Is this so-called K-shaped economy sustainable? Powell: We hear this all the time. Corporate financial reports for low-income consumers say people are tightening their belts. Meanwhile, asset values ​​(real estate, securities) are high, often owned by high-income earners. I don't know if this is sustainable. Most consumption is indeed done by those with more resources. From a societal perspective, a strong labor market in the long term is very good, as it benefits people with low incomes. This is a state we all want to return to. Christine Romans (follow-up question): Regarding the still weak housing market. With these rate cuts, is there a chance we'll see increased housing affordability? The median age of first-time homebuyers is now 40, a record high. Powell: The housing market faces significant challenges. I don't think a 25 basis point drop in the federal funds rate will have much of an impact on people. Housing supply is low. Many people have mortgages with extremely low interest rates from the pandemic, making moving expensive. Furthermore, our country has a long history of under-building housing. This is a structural housing shortage. We can raise and lower interest rates, but we really don't have the tools to address the long-term structural housing shortage. 13. Chris Rugaber (Associated Press): Wage growth is slowing. Where is the risk of inflation? If inflation is cooling, and hiring may be negative, why aren't we hearing more about interest rate cuts? Powell: The risk of inflation is obvious: tariff inflation. Most of us expect this to be a one-off event. But the risk is that it may last longer than expected. Another, less likely, possibility is that an overheated economy leads to traditional inflation. I don't think that's particularly likely. The committee has different assessments on this. 14. Neil Irwin (Axios): Do you think we are experiencing a positive productivity shock (whether from AI or policy)? To what extent does this drive the higher GDP forecast in the SEP? Powell: Yes, I never imagined seeing five or six consecutive years of 2% productivity growth. That's definitely higher. If you look at what AI can do, you can see the outlook for productivity. This could make those who use it more efficient, or it could force others to find other jobs. So yes, we've certainly seen higher productivity. 15. Matt Egan (CNN): After today, you only have three more meetings at the helm of the Federal Reserve. Have you thought about what you hope your legacy will be? Powell: My idea is that I really want to hand this job over to my successor when the economy is in very good shape. I want inflation under control, back to 2%, and I want a strong labor market. That's what I want to do. Matt Egan (follow-up question): After your term as chairman expires, do you plan to remain on the Federal Reserve Board? Powell: I'm focused on the remainder of my time as chairman. I have nothing new to tell you about that. 16. Mark Hamrick (Bankrate): Although many price levels remain high, rate cuts mean that savings rates (yields) have peaked, while borrowing rates remain high. Many Americans face challenges with liquidity or emergency savings. Is this merely collateral damage, or an unintended consequence of the limitations of your tools in addressing household liquidity constraints? Powell: I disagree that this is collateral damage from our policies. Over time, what we've done is create price stability and maximum employment, which is invaluable to everyone. When we raise rates to lower inflation, it does work by slowing the economy, but we've already brought policy rates back to levels that are no longer highly restrictive. I believe this is to help people get out of the effects of high inflation. We've actually weathered this wave of global inflation better than any other country. This is due to the exceptional nature of the U.S. economy. Thank you.