This week’s three questions and answers are about the neutral interest rate (and Fed interest rate policy), global economic volatility, and tariffs and productivity.
President Donald Trump said Thursday that he could announce his pick to lead the Federal Reserve “next week.” He repeated his demand that the central bank should lower interest rates more quickly, saying they should be as much as “3 points lower” than they were currently. The Fed’s benchmark short-term interest rate is currently 3.50% to 3.75%.
Today, the Federal Reserve left interest rates unchanged. The Federal Open Market Committee voted 10-2 to hold the benchmark federal funds short-term rate in a range of 3.5%-3.75%. Governors Christopher Waller and Stephen Miran dissented in favor of a quarter-point reduction.
In a post-meeting statement, Fed officials said “job gains have remained low, and the unemployment rate has shown some signs of stabilization.” Officials dropped language pointing to increased downside risks to employment that had appeared in the three previous statements.
The upgraded assessment of the labor market likely signals that the Fed will remain on hold at the March and April meetings. The CME FedWatch Tool put the odds of no change at the March 18 meeting at 86.5% and the odds of no change at the April 29 meeting at 74%.
It’s unlikely that the Federal Reserve will surprise financial markets when it meets on January 28. The CME FedWatch Tool on Friday showed the financial markets giving 97.2% odds that the central bank would hold its benchmark short term interest rate steady at 3.50% to 3.73%. It’s extremely unlikely that the Fed would have let the financial markets expecting rates to stay the same if the bank was planing a policy shift.
The yield on the 10-year U.s. Treasury board 2 basus points to 4.18% today in response to news that Justice Department is conducting a criminal investigation into Fed chair Jerome Powell over his Congressional testimony on the Fed’s building project. Yep, this major escalation of the Trump Administration’s campaign to force the Fed to cut interest rates more deeply and at a faster pace produced almost no reaction in the bond market.
I expect the huge 2025 rally in gold and silver to finish the year strong. But with the possibility of volatility as institutional investors try to game the next move in precious metals. In case you’re not up to date on this rally, gold was up 76% for 2025 as of December 26. Silver was up 160%. Gains like those inevitably fill investors heads with thoughts of corrections and reversions to the mean. But I think selling now is premature.
The Federal Reserve lowered interest rates by a quarter of a percentage point today,Wednesday. But revealed a huge disagreement on the course for 2026. The decision cut interest rates for a third meeting in a row, moving rates to a new range of 3.5% to 3.75%. It marked the fourth straight vote that was not supported by all members of the 12-person Federal Open Market Committee. Voting for today’s 25 basis point cut were Jerome Powell, chair; John Williams, vice chair; Michael Barr; Michelle Bowman; Susan Collins; Lisa Cook; Philip Jefferson; Alberto Musalem; and Christopher Waller. Voting against this action were Stephen Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting; and Austan Goolsbee and Jeffrey Schmid, who preferred no change to the target range at this meeting. The new target Fed Funds rate of 3.5% to 3.75% is, of course, a nominal rate. With the Fed’s preferred inflation measure, the Personal Consumption Expenditures index, running at 28.% in September, the last monthly data, the current nominal target rate is barely above 0% at 0.7% to 0.95%. Yep, we’re back to the days of 1% interest rates.
I normally don’t pay much attention to the ADP Research private payrolls report. It doesn’t track the official jobs number from the Bureau of Labor Statistics, which is what the Federal Reserve watches, very well. This time around, in addition, economists also cautioned against reading too much into the report released on Wednesday, arguing the monthly estimate has diverged from the government’s private payrolls count produced by the Labor Department’s Bureau of Labor Statistics. But since the BLS isn’t producing its next report–for November–until December 16 thanks to the government shutdown, the ADP report is the data we have. And it’s ugly. Jobs from private sector employers posted their biggest drop in more than two and a half years in November as small businesses shed jobs. Some economists said combining employment measures from the National Federation of Independent Business, the Conference Board, and regional Federal Reserve surveys confirmed labor market softness, but not the size of the drop shown by the ADP data.
A week ago investors and traders had thrown in the towel on the chances for a 25-basis point interest rate cut from the Federal Reserve at its December 10 meeting. The odds of a rate cut were down to 30.1% on November 19, according to the CME FedWatch Tool. Today a rate cut is back on the table with the odds back up to 84.7%. That’s roughly where the odds were a month ago–91.7%. And stocks are basically back where they were before worries about the rate cut kicked in.
Sure, deep worries about growth, profits, and soaring capital spending in the AI sectors were a major contributors to the market sell off. But let’s not forget the extraordinary reversal in investor sentiment about the likelihood of another 25 basis point cut in interest rates at the Fed’s December 10 meeting. On October 17, the CME FedWatch Tool calculated that the Fed Funds Futures market had priced in a 93.6% chance of another 25-basis point cut in interest rates. Today November 19, the market was pricing in only 32.8% odds of a cut. the odds of the Fed doing nothing to cut rates on December 10 had climbed to 67.2%. AI worries aside, that big a shift in expectations–when investors had just about decided that the Fed would cut again–puts strong downward pressure on stock prices.
As a reminder of how the ground has shifted in just a few weeks, today, November 19, the Federal Reserve released the minutes of its October 29 meeting.
Odds of a 25 basis point interest rate cut continued to fall today with the odds on the CME FedWatch Tool dropping to 33.6%. Odds of a 25 basis point cut were at 93.7% on October 17.
It looks like Federal Reserve chairJerome Powell has been granted his wish. Over the last couple of weeks Powell has repeatedly said that a December interest rate cut wasn’t a certainty. Pointing to stubbornly elevated inflation, he argued that he could make a case for holding rates steady.
The financial markets seem to have heard him. Month ago–on October 14–the CME FedWatch Tool put the odds of a 25 basis point cut on December 10 at 94.4%. Today, November 14, the odds of an interest rate cut are down in 45.9%. The odd that the Fed will stand pat are now a little better than 50%. To be completely fair Powell has had help in moving the odds.
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