Fed cuts rates again, even as its own data shows inflation staying over its target

The Federal Reserve had its widely anticipated decision on interest rates Wednesday, and they continued to loosen up the money spigot.

Fulfilling expectations of a “hawkish cut,” the central bank’s Federal Open Market Committee lowered its key overnight borrowing rate by a quarter percentage point, putting it in a range between 3.5%-3.75%.

However, the move carried caution flags about where policy is headed from here and featured “no” votes from three members, which hasn’t happened since September 2019....

Fed Chair Jerome Powell, at his post-meeting news conference, said the reduction puts the Fed in a comfortable position as far as rates go.

“We are well positioned to wait and see how the economy evolves,” Powell said.

Stocks rose following the decision, with the Dow Jones Industrial Average adding 500 points. Treasury yields moved mostly lower.

Wall Streeters sure love their rate cuts, no matter what happens in the real economy. But the interest rate cut was expected. The real news was what Fed officials were thinking about that real economy for 2026 and beyond, so let's click on to the Fed's economic projections, and see what they're saying.

For GDP, Fed officials generally thought we'd see stronger growth than they were thinking 3 months ago. In particular, the Fed officials are bumping the median growth projection for 2026 from 1.8-1.9% to a place well above 2%.

The Fed also thinks unemployment will tick up a bit from September's 4.4% figure for the rest of this year, but then will stop rising and tick back down by a similar amount next year.

,/p> And lastly, the Fed thinks inflation will drop a bit next year from 2025's rate of nearly 3%. But they still think it will be well above its alleged 2% target.

I find that last part on inflation interesting in a few ways. The first is because that PCE Index was just updated for September in last week's income and spending report, and it showed that inflation is no different over the last year as it was between September 2023 and September 2024. And worse, PCE inflation for groceries had a 0.4% increase in September after an August increase of 0.5%, which put the 12-month jump in PCE grocery prices at 2.4%, the largest increase in nearly 2 years, and double what it was a year ago.

You'd think that the Fed's projections of continued economic growth, slightly lower unemployment and inflation above the Fed's target would lead to a greater possibility of higher interest rates next year. But that's not what the majority of Fed officials were projecting in their "dot plot" of where they thought rates would be in comparison to today's post-cut range of 3.5%-3.75%.

Yes, a couple of those dot points are from people trying to kiss up to Trump and lessen their ridiculous debt burden. But that dot plot indicates to me that the Fed thinks the real world economy is weak and in danger of getting worse next year. It also tells me that all of the talk about the Fed being dedicated to a 2% inflation rate isn't really true. Because if they're not going to raise rates as inflation stays above 2% for the 5th straight year and the economy continues to grow, that 2% figure isn't as important to the Fed as we were being told all these years.

I'm fine with that, as this country grew just fine in the '80s and '90s, even though inflation consistently was above 3%. I'd prefer another 1% of inflation over 1% of unemployment, and it seems the Fed is finally coming around to that thinking as well. Naturally, it happens when Republicans are in charge, and yes, I don't find that 100% coincidental.