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Three Dissents as the FOMC Cuts Its Target for the Federal Funds Rate

Photo from federalreserve.gov

Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) had the expected result with the committee deciding to lower its target for the federal funds rate from a range of 3.75 percent to 4.00 percent to a range of 3.50 percent to 3.75 percent—a cut of 25 basis points. The members of the committee voted 9 to 3 in favor of the cut. Fed Governor Stephen Miran voted against the action, preferring to lower the target range for the federal funds rate by 50 basis points. President Austan Goolsbee of the Federal Reserve Bank of Chicago and President Jeffrey Schmid of the Federal Reserve Bank of Kansas City also voted against the action, preferring to leave the target range unchanged.

The following figure shows for the period since January 2010, the upper bound (the blue line) and the lower bound (the green line) for the FOMC’s target range for the federal funds rate, as well as the actual values for the federal funds rate (the red line). Note that the Fed has been successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate within its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)

After the meeting, the committee also released a “Summary of Economic Projections” (SEP)—as it typically does after its March, June, September, and December meetings. The SEP presents median values of the 19 committee members’ forecasts of key economic variables. The values are summarized in the following table, reproduced from the release. (Note that only 5 of the district bank presidents vote at FOMC meetings, although all 12 presidents participate in the discussions and prepare forecasts for the SEP.)

There are several aspects of these forecasts worth noting:

Compared with September, the committee members increased their forecasts of real GDP growth for each year from 2025 through 2027. The increase for 2026 was substantial, from 1.8 percent to 2.3 percent, although some of this increase was attributable to the federal government shutdown causing some economic output to be shifted from 2025 to 2026. Committee members slightly decreased their forecasts of the unemployment rate in 2027. They left their forecast of the unemployment rate in the fourth quarter of 2025 unchanged at 4.5 percent.
Committee members reduced their forecasts for personal consumption expenditures (PCE) price inflation for 2025 and 2026. Similarly, their forecasts of core PCE inflation for 2025 and 2026 were also reduced. The committee does not expect that PCE inflation will decline to the Fed’s 2.0 percent annual target until 2028.
The committee’s forecasts of the federal funds rate at the end of each year from 2025 through 2028 were unchanged.

Prior to the meeting there was much discussion in the business press and among investment analysts about the dot plot, shown below. Each dot in the plot represents the projection of an individual committee member. (The committee doesn’t disclose which member is associated with which dot.) Note that there are 19 dots, representing the 7 members of the Fed’s Board of Governors and all 12 presidents of the Fed’s district banks.

The plots on the far left of the figure represent the projections by the 19 members of the value of the federal funds rate at the end of 2025. The fact that several members of the committee preferred that the federal funds rate end 2025 above 4 percent—in other words higher than it will be following the vote at today’s meeting—indicates that several non-voting district bank presidents, beyond Goolsbee and Schmid, would have preferred to not cut the target range. The plots on the far right of the figure indicate that there is substantial disagreement among comittee members as to what the long-run value of the federal funds rate—the so-called neutral rate—should be.

During his press conference following the meeting, Powell indicated that the increase in inflation in recent months was largely due to the effects of the increase in tariffs on goods prices. Powell indicated that committee members expect that the tariff increases will cause a one-time increase in the price level, rather than causing a long-term increase in the inflation rate. Powell also noted the recent slow growth in employment, which he noted might actually be negative once the Bureau of Labor Statistics revises the data for recent months. This slow growth indicated that the risk of unemployment increasing was greater than the risk of inflation increasing. As a result, he said that the “balance of risks” caused the committee to believe that cutting the target for the federal funds rate was warranted to avoid the possibility of a significant rise in the unemployment rate.

The next FOMC meeting is on January 27–28. By that time a significant amount of new macroeconomic data, which has not been available because of the government shutdown, will have been released. It also seems likely that President Trump will have named the person he intends to nominate to succeed Powell as Fed chair when Powell’s term ends on May 15, 2026. (Powel’s term on the Board doesn’t end until January 31, 2028, although he declined at the press conference to say whether he will serve out the remainder of his term on the Board after he steps down as chair.) In addition, it’s possible that by the time of the next meeting the Supreme Court will have ruled on whether President Trump can legally remove Governor Lisa Cook from the Board and on whether President Trump’s tariff increases this year are Constitutional.

Unusual FOMC Meeting Leads to Expected Result of Rate Cut

Photo of Fed Chair Jerome Powell from federalreserve.gov

Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) occurred against a backdrop of President Trump pressuring the committee to reduce its target for the federal funds rate. In a controversial move, Trump nominated Stephen Miran, chair of Council of Economic Advisers (CEA), to fill an open seat on the Fed’s Board of Governors. Miran took a leave of absence from the CEA rather than resign his position, which made him the first member of the Board of Governors in decades to maintain an appointment elsewhere in the executive branch while serving on the Board. In addition, Trump had fired Governor Lisa Cook on the grounds that she had committed fraud in applying for a mortgage at a time before her appointment to the Board. Cook denied the charge and a federal appeals court sustained an injunction allowing her to participate in today’s meeting.

As most observers had expected, the committee decided today to lower its target for the federal funds rate from a range of 4.25 percent to 4.50 percent to a range of 4.00 percent to 4.25 percent—a cut of 0.25 percentage point, or 25 basis points. The members of the committee voted 11 to 1 for the 25 basis point cut with Miran dissenting because he preferred a 50 basis point cut.

The following figure shows, for the period since January 2010, the upper bound (the blue line) and lower bound (the green line) for the FOMC’s target range for the federal funds rate and the actual values of the federal funds rate (the red line) during that time. Note that the Fed has been successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)

There are several aspects of these forecasts worth noting:

Committee members slightly increased their forecasts of real GDP growth for each year from 2025 through 2027. Committee members also slightly decreased their forecasts of the unemployment rate in 2026 and 2027. They left their forecast of unemployment in the fourth quarter of 2025 unchanged at 4.5 percent. (The unemployment rate in August was 4.3 percent.)
Committee members left their forecasts for personal consumption expenditures (PCE) price inflation unchanged for 2025 and 2026, while raising their forecast for 2026 from 2.4 percent to 2.6 percent. Similarly, their forecasts of core PCE inflation were unchanged for 2025 and 2027 but increased from 2.4 percent to 2.6 percent for 2026. The committee does not expect that PCE inflation will decline to the Fed’s 2 percent annual target until 2028.
The committee’s forecast of the federal funds rate at the end of 2025 was lowered from 3.9 percent in June to 3.6 percent today. They also lowered their forecast for federal funds rate at the end of 2026 from 3.6 percent to 3.4 pecent and at the end of 2027 from 3.4 percent to 3.1 percent.

The plots on the far left of the figure represent the projections of each of the 19 members of the value of the federal funds rate at the end of 2025. Ten of the 19 members expect that the committee will cut its target range for the federal funds rate by at least 50 basis points in its two remaining meetings this year. That narrow majority makes it likely that an unexpected surge in inflation during the next few months might result in the target range being cut by only 25 basis points or not cut at all. Members of the business press and financial analysts are expecting tht the committee will implement a 25 basis point cut in each of its last two meetings this year.

During his press conference following the meeting, Powell indicated that the recent increase in inflation was largely due to the effects of the increase in tariff rates that the Trump administration began implementing in April. (We discuss the recent data on inflation in this post.) Powell indicated that committee members expect that the tariff increases will cause a one-time increase in the price level, rather than causing a long-term increase in the inflation rate. Powell also noted recent slow growth in real GDP and employment. (We discuss the recent employment data in this blog post.) As a result, he said that the shift in the “balance of risks” caused the committee to believe that cutting the target for the federal funds rate was warranted to avoid the possibility of a significant rise in the unemployment rate.

The next FOMC meeting is on October 28–29 by which time the status of Lisa Cook on the committee may have been clarified. It also seems likely that President Trump will have named the person he intends to nominate to succeed Powell as Fed chair when Powell’s term ends on May 15, 2026. (Powel’s term on the Board doesn’t end until January 31, 2028, although Fed chairs typically resign from the Board if they aren’t reappointed as chair). And, of course, additional data on inflation and unemployment will also have been released.

Latest CPI Report Shows Slowing Inflation and the FOMC Appears Likely to Cut Its Target for the Federal Funds Rate at Least Once This Year

Image of “a woman shopping in a grocery store” generated by ChatGTP 4o.

Today (June 12) we had the unusual coincidence of the Bureau of Labor Statistics (BLS) releasing its monthly report on the consumer price index (CPI) on the same day that the Federal Open Market Committee (FOMC) concluded a meeting. The CPI report showed that the inflation rate had slowed more than expected. As the following figure shows, the inflation rate for May measured by the percentage change in the CPI from the same month in the previous month—headline inflation (the blue line)—was 3.3 percent—slightly below the 3.4 percent rate that economists surveyed by the Wall Street Journal had expected, and slightly lower than the 3.4 percent rate in April. Core inflation (the red line(—which excludes the prices of food and energy—was 3.4 percent in May, down from 3.6 percent in April and slightly lower than the 3.5 percent rate that economists had been expecting.

As the following figure shows, if we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—the declines in the inflation rate are much larger. Headline inflation (the blue line) declined from 3.8 percent in April to 0.1 percent in May. Core inflation (the red line) declined from 3.6 percent in April to 2.0 percent in May. Overall, we can say that inflation has cooled in May and if inflation were to continue at the 1-month rate, the Fed will have succeeded in bringing the U.S. economy in for a soft landing—with the annual inflation rate returning to the Fed’s 2 percent target without the economy being pushed into a recession.

But two important notes of caution:

1. It’s hazardous to rely to heavily on data from a single month. Over the past year, the BLS has reported monthly inflation rates that were higher than economists expected and rates that was lower than economists expected. The current low inflation rate would have to persist over at least a few more months before we can safely conclude that the Fed has achieved a safe landing.

2. As we discuss in Macroeconomics, Chapter 15, Section 15.5 (Economics, Chapter 25, Section 25.5), the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI in evaluating whether it is hitting its 2 percent inflation target. So, today’s encouraging CPI data would have to carry over to the PCE data that the Bureau of Economic Analysis (BEA) will release on January 28 before we can conclude that inflation as the Fed tracks it did in fact slow significantly in April.

The BLS released the CPI report at 8:30 am eastern time. The FOMC began its meeting later in the day and so committee members were able to include in their deliberations today’s CPI data along with other previously available information on the state of the economy. At the close of the meeting, , the FOMC released a statement in which it stated, as expected, that it would leave its target range for the federal funds rate unchanged at 5.25 percent to 5.50 percent. After the meeting, the committee also released—as it typically does at its March, June, September, and December meetings—a “Summary of Economic Projections” (SEP), which presents median values of the committee members’ forecasts of key economic variables. The values are summarized in the following table, reproduced from the release.

The table shows that compared with their projections in March—the last time the FOMC published the SEP—committee members were expecting higher headline and core PCE inflation and a higher federal funds rate at the end of this year. In the long run, committee members were expecting a somewhat highr unemployment rate and somewhat higher federal funds rate than they had expected in March.

Note, as we discuss in Macreconomics, Chapter 14, Section 14.4 (Economics, Chapter 24, Section 24.4 and Essentials of Economics, Chapter 16, Section 16.4), there are twelve voting members of the FOMC: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four of the other 11 Federal Reserve Banks, who serve one-year rotating terms. In 2024, the presidents of the Richmond, Atlanta, San Francisco, and Cleveland Feds are voting members. The other Federal Reserve Bank presidents serve as non-voting members, who participate in committee discussions and whose economic projections are included in the SEP.

The plots on the far left of the figure represent the projections of each of the 19 members of the value of the federal funds rate at the end of 2024. Four members expect that the target for the federal funds rate will be unchanged at the end of the year. Seven members expect that the committee will cut the target range once, by 0.25 percentage point, by the end of the year. And eight members expect that the cut target range twice, by a total of 0.50 percent point, by the end of the year. Members of the business media and financial analysts were expecting tht the dot plot would project either one or two target rate cuts by the end of the year. The committee was closely divided among those two projections, with the median projection being for a single rate cut.

In its statement following the meeting, the committee noted that:

“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‐backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.”

In his press conference after the meeting, Fed Chair Jerome Powell noted that the morning’s CPI report was a “Better inflation report than nearly anyone expected.” But, Powell also noted that: “You don’t want to be motivated any one data point.” Reinforcing the view quoted above in the committee’s statement, Powell emphasized that before cutting the target for the federal funds rate, the committee would need “Greater confidence that inflation is moving back to 2% on a sustainable basis.”

In summary, today’s CPI report was an indication that the Fed is on track to bring about a soft landing, but the FOMC will be closely analyzing macroeconomic data over at least the next few months before it is willing to cut its target for the federal funds rate.

Another Steady-as-She-Goes FOMC Meeting

Federal Reserve Chair Jerome Powell (Photo from the New York Times)

As always, economists and investors had been awaiting the outcome of today’s meeting of the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) to get further insight into future monetary policy. The expectation has been that the FOMC would begin reducing its target for the federal funds rate, mostly likely beginning with its meeting on June 11-12. Financial markets were expecting that the FOMC would make three 0.25 percentage point cuts by the end of the year, reducing its target range from the current 5.25 to 5.50 percent to 4.50 to 4.75 percent.

There appears to be nothing in the committees statement (found here) or in Powell’s press conference following the meeting to warrant a change in expectations of future Fed policy. The committee’s statement noted that: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” As Powell stated in his press conference, although the committee found the general trend in inflation data to be encouraging, they would have to see additional months of data that were consistent with their 2 percent inflation target before reducing their target for the federal funds rate.

As we’ve noted in earlier blog posts (here, here, and here), inflation during January and February has been somewhat higher than expected. Some economists and investors had wondered if, as a result, the committee might delay its first cut in the federal funds target range or implement only two cuts rather than three. In his press conference, Powell seemed unconcerned about the January and February data and expected that falling inflation rates of the second half of 2023 to resume.

Typically, at the FOMC’s December, March, June, and September meetings, the committee releases a “Summary of Economic Projections” (SEP), which presents median values of the committee members’ forecasts of key economic variables.

The table shows that the committee members made relatively small changes to their projections since their December meeting. Most notable was an increase in the median projection of growth in real GDP for 2024 from 1.4 percent at the December meeting to 2.1 percent at this meeting. Correspondingly, the median projection of unemployment during 2024 dropped from 4.1 percent to 4.0 percent. The key projection of the value of the federal funds rate at the end of 2024 was left unchanged at 4.6 percent. As noted earlier, that rate is consistent with three 0.25 percent cuts in the target range during the remainder of the year.

The SEP also includes a “dot plot.” Each dot in the plot represents the projection of an individual committee member. (The committee doesn’t disclose which member is associated with which dot.) Note that there are 19 dots, representing the 7 members of the Fed’s Board of Governors and the 12 presidents of the Fed’s district banks. Although only the president of the New York Fed and the presidents of 4 of the 11 district banks are voting members of the committee, all the district bank presidents attend the committee meetings and provide economic projections.

The plots on the far left of the figure represent the projections of each of the 19 members of the value of the federal funds rate at the end of 2024. These dots are bunched fairly closely around the median projection of 4.6 percent. The dots representing the projections for 2025 and 2026 are more dispersed, representing greater uncertainty among committee members about conditions in the future. The dots on the far right represent the members’ projections of the value of the federal funds rate in the long run. As Table 1 shows, the median projected value is 2.6 percent (up slightly from 2.5 percent in December), although the plot indicates that all but one member expects that the long-run rate will be 2.5 percent or higher. In other words, few members expect a return to the very low federal funds rates of the period from 2008 to 2016.

Why Don’t Financial Markets Believe the Fed?

Fed Chair Jerome Powell holding a news conference following the March 22 meeting of the FOMC. Photo from Reuters via the Wall Street Journal.

On March 22, the Federal Open Market Committee (FOMC) unanimously voted to raise its target for the federal funds rate by 0.25 percentage point to a range of 4.75 percent to 5.00 percent. The members of the FOMC also made economic projections of the values of certain key economic variables. (We show a table summarizing these projections at the end of this post.) The summary of economic projections includes the following “dot plot” showing each member of the committee’s forecast of the value of the federal funds rate at the end of each of the following years. Each dot represents one member of the committee.

If you focus on the dots above “2023” on the vertical axis, you can see that 17 of the 18 members of the FOMC expect that the federal funds rate will end the year above 5 percent.

In a press conference after the committee meeting, a reporter asked Fed Chair Jerome Powell was asked this question: “Following today’s decision, the [financial] markets have now priced in one more increase in May and then every meeting the rest of this year, they’re pricing in rate cuts.” Powell responded, in part, by saying: “So we published an SEP [Summary of Economic Projections] today, as you will have seen, it shows that basically participants expect relatively slow growth, a gradual rebalancing of supply and demand, and labor market, with inflation moving down gradually. In that most likely case, if that happens, participants don’t see rate cuts this year. They just don’t.” (Emphasis added. The whole transcript of Powell’s press conference can be found here.)

Futures markets allow investors to buy and sell futures contracts on commodities–such as wheat and oil–and on financial assets. Investors can use futures contracts both to hedge against risk–such as a sudden increase in oil prices or in interest rates–and to speculate by, in effect, betting on whether the price of a commodity or financial asset is likely to rise or fall. (We discuss the mechanics of futures markets in Chapter 7, Section 7.3 of Money, Banks, and the Financial System.) The CME Group was formed from several futures markets, including the Chicago Mercantile Exchange, and allows investors to trade federal funds futures contracts. The data that result from trading on the CME indicate what investors in financial markets expect future values of the federal funds rate to be. The following chart shows values after trading of federal funds futures on March 24, 2023.

The chart shows six possible ranges for the federal funds rate after the FOMC’s last meeting in December 2023. Note that the ranges are given in basis points (bps). Each basis point is one hundredth of a percentage point. So, for instance, the range of 375-400 equals a range of 3.75 percent to 4.00 percent. The numbers at the top of the blue rectangles represent the probability that investors place on that range occurring after the FOMC’s December meeting. So, for instance, the probability of the federal funds rate target being 4.00 percent to 4.25 percent is 28.7 percent. The sum of the probabilities equals 1.

Note that the highest target range given on the chart is 4.50 percent to 4.75 percent. In other words, investors in financial markets are assigning a probability of zero to an outcome that the dot plot shows 17 of 18 FOMC members believe will occur: A federal funds rate greater than 5 percent. This is a striking discrepancy between what the FOMC is announcing it will do and what financial markets think the FOMC will actually do.

In other words, financial markets are indicating that actual Fed policy for the remainder of 2023 will be different from the policy that the Fed is indicating it intends to carry out. Why don’t financial markets believe the Fed? It’s impossible to say with certainty but here are two possibilities:

Markets may believe that the Fed is underestimating the likelihood of an economic recession later this year. If an economic recession occurs, markets assume that the FOMC will have to pivot from increasing its target for the federal funds rate to cutting its target. Markets may be expecting that the banks will cut back more on the credit they offer households and firms as the banks prepare to deal with the possibility that substantial deposit outflows will occur. The resulting credit crunch would likely be enough to push the economy into a recession.
Markets may believe that members of the FOMC are reluctant to publicly indicate that they are prepared to cut rates later this year. The reluctance may come from a fear that if households, investors, and firms believe that the FOMC will soon cut rates, despite continuing high inflation rates, they may cease to believe that the Fed intends to eventually bring the inflation back to its 2 percent target. In Fed jargon, expectations of inflation would cease to be “anchored” at 2 percent. Once expectations become unanchored, higher inflation rates may become embedded in the economy, making the Fed’s job of bringing inflation back to the 2 percent target much harder.

In late December, we can look back and determine whose forecast of the federal funds rate was more accurate–the market’s or the FOMC’s.