FOMC Cuts Federal Funds Rate 50 Basis Points, Says Next Steps to Be Decided Meeting by Meeting

Economic

Summary:

The Fed cut rates by 50 basis points, with future decisions made meeting by meeting as inflation cools and employment concerns rise.

The Federal Reserve undertook a major shift in the direction of monetary policy Wednesday, cutting short-term interest rates by a fairly aggressive half percentage point and projecting substantial further rate reductions over coming months and years.

Brushing aside concerns that a rate cut this close to the November presidential election might be construed as political, Chair Jerome Powell explained the move by saying that increased confidence in inflation reduction and greater concern about employment justified “recalibrating” monetary policy to a “more neutral” stance.

Powell made clear that more monetary easing is in the offing, saying the Fed has “made a good start” toward making interest rates “more normal,” and he said the size of the rate cut should be seen as “a sign of our confidence that inflation is coming down to 2% on sustainable basis.”

At the same time, though, he said the Fed’s rate-setting Federal Open Market Committee “will not be in any rush,” but will set rates on a “meeting by meeting” basis in response to what incoming economic data seem to say about “the outlook and the balance of risks.”

Declining to specify the pace of future rate cuts, Powell said the FOMC could move faster or slower, or take a “pause” as warranted by the economic data.

Although some financial market participants had called for a more modest 25 basis point rate cut, the FOMC decided to reduce the federal funds rate by 50 basis points to a target range of 4.75% to 5.00%, after leaving it unchanged since last July. In a relatively rare dissent, Fed Governor Michelle Bowman opposed the action, because she favored a 25 basis point move.

The FOMC had previously raised its policy rate 525 basis points to combat inflation after holding it near zero for two years through March 2022 to counter the pandemic’s economic fall-out.

In their revised quarterly Summary of Economic Projections, the 19 FOMC participants projected the funds rate will end 2024 at a median 4.4, implying 50 basis points of further reductions to a target range of 4.25% to 4.5% over the final two meetings of the year.

The officials deemed that “appropriate policy” will require further rate reductions next year.They project the funds rate will fall by another 100 basis points to a median 3.4% by the end of 2025 (a range of 3.25% to 3.5%), and to 2.9% by the end of 2026 (a range of 2.75% to 3.0%).

Significantly also, the officials further raised their estimate of the “longer run” funds rate by a tenth to 2.9%. Implicitly, that includes the 2% inflation target plus a 0.9% real interest rate, implying that the FOMC would need to lower the nominal funds rate an additional 200 basis points to get the policy rate to “neutral” – something which Powell said needs to be done.

As projected, the funds rate will reach that neutral 2.9% level at the end of 2026.

The FOMC had previously raised the longer run estimate a tenth in March and two tenths in June, as Fed officials came to believe that the real equilibrium short-term interest rate (r*) had risen. A higher real rate implies a higher neutral rate and, in turn, a higher nominal funds rate to achieve the Fed’s dual mandate objectives.

The distribution of projections in the FOMC’s “dot plot” shows considerable division among officials. While nine favored cutting the funds rate to a range of 4.25% to 4.5% by the end of 2024, seven favored cutting it to a range of 4.5% to 4.75%..

The economic forecasts accompanying the rate projections support the FOMC’s plans for continued monetary easing.

The officials forecast that PCE inflation will end 2024 at 2.3% – three tenths lower higher than forecast in June. Core PCE inflation is expected to close out the year at 2.6% — down from 2.8%.PCE inflaion is forecast to fall to 2.1% next year and then to 2.0% in 2026. Their forecast of 2.0% real GDP growth is down from the 2.1% forecast in June. The unemployment rate is forecast to be 4.4%, up from 4.0% in the June SEP, and to go no higher than that next year.

The FOMC’s much anticipated, but nonetheless momentous decision, comes after a series of data reports showing a combination of moderating inflation and cooling labor markets. In August, the consumer price index was up 2.5% from a year earlier, down from July’s 2.9%. Core CPI was up 3.2%. Non-farm payroll gains slowed to 142,000 last month, but the unemployment rate fell a tenth to 4.2%, and average hourly earnings accelerated to 3.8%. Real GDP growth, meanshile, has continued at 2% or more.

In announcing the rate reduction, the FOMC necessarily made important changes to its policy statement. Gone is the previous assertion 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%.” Instead, the key third paragraph of the new statement says, “Inconsidering additional 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.”

In the preceding paragraph, the FOMC now says, “The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

By contrast, the FOMC had previously said, “The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”Talking to reporters after the FOMC announcements, Powell defended both the timing and the size of the rate cut, while insisting that the action was not in any way designed to help or hurt either presidential candidate.

Explaining why the FOMC had waited until now to start lowering rates – well after other central banks had begun doing so – he said, “our patient approach has paid dividends” in terms of having “gained confidence that inflation is moving sustainably to 2%.”

Powell denied that the Fed has gotten “behind the curve” by waiting to cut rates.

Explaining why the FOMC moved ahead with a 50 basis point cut, he echoed the FOMC statement. “As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased. We now see the risks to achieving our employment and inflation goals as roughly in balance, and we are attentive to the risks to both sides of our dual mandate.”

Powell said, “this recalibration of our policy stance will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we begin the process of moving toward a more neutral stance.”

He emphasized “we are not on any preset course. We will continue to make our decisions meeting by meeting.”

Powell said the FOMC was conscious that “that reducing policy restraint too quickly could hinder progress on inflation,” but that “at the same time, reducing restraint too slowly could unduly weaken economic activity and employment.”

The Fed chief also stressed that the FOMC is prepared to be flexible in its “meeting by meeting” approach to policy making.

“As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals,” he said. “If the economy remains solid and inflation persists, we can dial back policy restraint more slowly. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.”

In this “process of recalibrating our policy stance…to place a that’s more appropriate,” Powell said, “we’re not in a rush to get this done…. We can go quicker if that’s appropriate; we can go slower if that’s appropriate, “or we can pause.”

Calling both the economy and the labor market “solid,” he suggested the FOMC can afford to take its time and move incrementally. “We can continue to remove restriction, look at how the economy reacts to that… (and) ask ‘is our policy stance appropriate.’”

“In no sense is the Committee in a rush,” he went on. “We’ve made a good strong start to this, which is a sign of our confidence that inflation is coming down to 2% on sustainable basis, so we can make a good strong start’ at easing.

“We’re going to go carefully meeting by meeting and make our decisions as we go,” he added.

In light of weaker jobs data, including ta more than 800,000 downward seasonal adjustment to payrolls, Powell was asked whether the FOMC had waited too long to start lowering rates.

“We don’t’ think we’re behind,’he replied. On the contrary, “we think (our action) is timely .… The intention is not to get behind.”

Powell warned markets not to assume that the FOMC will continue cutting rates by 50 basis points per meeting. “I don’t think anyone should look at this and think this is the new pace.”

“We’re recalibrating policy over time to a more neutral level,” he elaborated. “We’re moving at a pace we think is appropriate given the base case for the economy.”

The size and frequency of future rate cuts will depend on how the economy evolves, Powell said, adding that the Fed has acted efficiently to achieve its dual mandate of price stability and maximum employment.

Defending the Fed’s past actions, he said. “We think our policy was appropriately restrictive.”

“Now, we think it’s time to begin the process of recalibrating to a stance that’s more neutral as opposed to restrictive,’ he reiterated. “That process will take some time…”

As the “recalibration’ process proceeds, he said “other rates will come down as well.”

In fact, market rates have been falling in anticipation of Wednesdays rate cut. For example, since the July 31 FOMC meeting, the 10-year Treasury note yield has fallen from 4.1340% to 3.60% on the eve of Wednesday’s meeting, and that has translated into a similar decline in mortgage rates.

Source: MaceNews

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Pepperstone

Central Bank

Economic

Where We Stand –

The dust continues to settle on the FOMC’s ‘jumbo’ 50bp cut this morning, albeit with such a reduction having been framed as a ‘recalibration’ in policy, rather than a sign of things to come, particularly with the ‘dot plot’ pointing to 25bp cuts at each of the final two meetings this year. A “hawkish 50bp cut”, anyone?

In any case, stocks have lurched higher overnight, with ‘green on the screen’ across the globe, as buyers come to the fore once more, with both the S&P 500 and Nasdaq 100 futures gaining well over 1% at the time of writing. The path of least resistance continues to lead to the upside.

Despite Chair Powell being at pains to stress that participants should not consider 50bp cuts the norm from here on in, the USD OIS curve has priced an aggressively more dovish outlook, seeing around 70bp of further easing by year-end, almost an entire rate cut more than the dots signalled. Reining in market expectations could well be the first task for Fed speakers, when the blackout period ends.

Another point that was interesting from yesterday’s FOMC is the faith that policymakers have in their economic forecasts. With inflation still above target, unemployment at 4.2% (and having fallen in August), plus the economy having grown by more than 2% in seven of the last eight quarters, there is little at face value to suggest the need for such a sizeable rate cut. Instead, the move to deliver such a cut was seemingly driven by the 0.4pp upward revision to this year’s unemployment forecast, and 0.2pp downward revision to the core PCE projection.

If you think the Fed’s forecasts are right, you’ll think 50bp was justified. If you think them too gloomy, as I do, you’ll think 50bp was over-the-top. Either way, most folk will be hoping that this is not a repeat of the last two times the FOMC kicked-off an easing cycle with a 50bp move – 2007, and 2001, are not years that many look back on fondly.

For markets, yesterday’s FOMC was a rollercoaster ride, with the knee-jerk equity & Treasury demand, plus USD weakness, on the decision itself fading rather rapidly. The greenback ended higher, with the DXY reclaiming the 101 handle, consolidating there overnight, as all G10s gave up earlier gains. This included a rather rapid retracement in cable from a 2-and-a-half year high just shy of 1.33. If you’d told me, this time yesterday, that the buck would end the day in the green after a 50bp cut, I probably wouldn’t have believed you.

In any case, yesterday’s decision doesn’t feel like a game-changer from a broader perspective. The forceful Fed put remains in place, with policymakers clearly willing and able to move quickly with rate cuts were the economy to roll over further. At the same time, there was relatively little clarity on the pace at which rates will return to a neutral level, giving FX and FI operators relatively little to go off.

The issue here, for policymakers and market participants alike, is that while the direction of travel – i.e., rate cuts – may be clear, the speed of the journey, and the destination to which we are travelling, are both unknown!!

Crudely, though, Powell & Co.’s reaction function for now seems to be that 25bp cuts will come, at every meeting in the short-term, unless data – particularly jobs figures – softens beyond expectations, at which point 50bp moves are in the frame once again.

Look Ahead –

Another busy day of policy decisions awaits, though today’s events should be somewhat more straightforward to navigate.

The ‘Old Lady of Threadneedle Street’ highlights proceedings, with the BoE’s MPC set to keep Bank Rate unchanged at 5% this lunchtime, having delivered this cycle’s first rate cut back in August. Then, in a 5-4 vote, the MPC set a relatively high bar to further easing, with a cut off the table this time around, particularly considering yesterday’s rise in both core and services CPI, to 3.6% YoY and 5.6% YoY respectively.

My base case is for an 8-1 MPC vote in favour of holding Bank Rate steady, with just external member Dhingra dissenting in favour of back-to-back cuts, though there is a chance that either, or both, Deputy Governor Ramsden, and new external member Taylor, join her in this dovish camp. Either way, the policy statement should be a ‘copy and paste’ of that issued las time out, signalling a slow and steady approach to removing policy restriction.

The BoE’s latest decision on quantiatitve tightening is also due. At a minimum, despite surging repo usage and signs of a funding squeeze beginning to emerge, I’d expect the annual pace of balance sheet run-off to remain at £100bln, if only to account for the sharp rise in gilt redemptions next year, which would see the pace of active sales drop below £15bln if the overall QT pace were maintained. There is, hence, a case to quicken the overall pace of run-off, though I doubt the MPC go down this route, particularly given the difficulties that policymakers would have in communicating easing conditions via Bank Rate cuts, while simultaneously tightening them via quicker balance sheet run-off.

Away from the BoE, the Norges Bank are also set to decide policy today, though few fireworks are expected, with rates set to remain at 4.50%. Of interest will be whether the NB signal the potential for cuts this year, having previously not pencilled in a rate reduction until 2025. The NOK OIS curve fully prices just one 25bp cut by year-end, hence markets shouldn’t be too surprised by any potentially dovish rhetoric.

Elsewhere, today, the weekly US jobless claims report is worth a cursory glance, if only due to the initial claims print coinciding with the survey week for the September payrolls report. Existing home sales, and the Philly Fed’s manufacturing survey, are also both due, though unlikely to significantly move the needle. The same can be said for remarks from the ECB’s Schnabel, Nagel, Panetta and Knot through the day, which are Knot likely to provide much new information (sorry!).

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BOC

Remarks of Officials

Central Bank

On September 18, the Bank of Canada (BOC) released the minutes of its monetary policy meeting. The main points are as follows:

The economy had grown by 2.1% in the second quarter, which was stronger than anticipated in the July Report. This strength was due mainly to an increase in spending by governments as well as a boost to business investment. Overall consumption growth had slowed to 0.6%, and per capita consumption had contracted by 2.4% while population growth remained strong.

The labor market had continued to weaken, with labor force growth outpacing employment growth. Layoffs remained muted, but unemployment had risen among newcomers to Canada and youth as new workers were having more difficulty finding a job. Wage growth remained elevated when compared with productivity growth. Members expected wage growth to ease in the months ahead given the slack in the labor market.

Consumer price index (CPI) inflation had eased further in July to 2.5%, in line with the Bank's forecast. Core inflation measures continued to ease as well. Shelter price inflation remained the largest contributor to overall inflation. Members noted that this component showed early signs of easing, with growth in mortgage interest costs coming down and rent inflation edging lower from its recent peak. Inflation in prices for services excluding shelter had also eased slightly in July, a sign of the diminished risk that these price pressures would persist.

Members discussed the balance of risks to the outlook for inflation. Some members took the view that the risks were balanced, with strength in shelter and services price inflation offsetting the downward pressure from excess supply. Some had become more concerned with the downside risks to inflation, particularly if the economy and labor market weakened further.

Overall, members agreed that with broad inflationary pressures continuing to ease, it was appropriate to reduce the policy rate further. They decided to cut the policy rate by another 25 basis points to 4¼%. If inflation continued to ease as expected, it was reasonable to expect that the policy rate would decline further.

Minutes of BOC Policy Meeting

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ING

Commodity

Energy – SPR refill

While oil prices saw a brief spike following the Fed's 50bp rate cut, the market settled marginally lower on the day. In early morning trading in Asia, oil is again under pressure. Expectations for a 50bp cut had grown in recent weeks, so the move was largely priced in.

For oil, that means attention will likely turn back to demand worries. China has obviously been the key concern when it comes to demand, but there have also been reports of refiners in Europe cutting run rates due to poor margins.

EIA weekly numbers yesterday showed that US commercial crude oil inventories fell by 1.63m barrels over the last week, somewhat different to the 1.96m barrel build the API reported the previous day. US commercial crude oil inventories are now at their lowest level in a year. Crude inventories at the WTI delivery hub, Cushing, also fell by 1.98m barrels over the week to 22.71m barrels, which will also create noise around inventories nearing tank bottoms and provide some support to prompt WTI timespreads. The draw in inventories was driven by trade. Crude oil exports grew by 1.28m b/d WoW, while imports fell by 545k b/d. On the refined product side, small builds were reported. Gasoline and distillate stocks increased by 69k barrels and 125k barrels respectively. Gasoline demand continues to trend lower following the end of the summer driving season. The 4-week average implied demand number fell by 104k b/d WoW to 8.88m b/d.

The US administration is looking to buy 6m barrels of crude oil for the Strategic Petroleum Reserve (SPR) for delivery February-May 2025. Given the recent weakness in oil prices, it makes sense for the Department of Energy (DoE) to increase purchases to refill the SPR. The DoE’s target price is below US$79.99/bbl, while WTI early 2025 forwards are trading sub-$69/bbl currently.

Metals – Zinc surplus eases

The latest data from the International Lead and Zinc Study Group (ILZSG) shows that the global zinc market recorded a surplus of 254kt in the first seven months, lower than the surplus of 466kt during the same period last year. Global refined zinc production remained almost flat at 8.1mt, while total consumption reported gains of 2.6% YoY to 7.8mt between January and July 2024. As for lead, total production was flat at around 7.6mt while consumption fell by 1.3% YoY to 7.5mt over the first seven months of the year. The global lead market witnessed a surplus of 59kt in Jan’24-Jul’24, compared to a deficit of 36kt during the same period last year.

The latest batch of trade numbers from Chinese Customs shows that imports of unwrought aluminium and aluminium products rose 2% YoY to 280kt in August, while cumulative shipments increased 51% to 2.6mt in the first eight months of 2024. For steel products, exports increased by almost 15% YoY to 9.5mt, which leaves cumulative steel product exports at 70.58mt over the first eight months of the year, up 20% YoY. Weaker domestic demand continues to see larger volumes of steel exports from China.

Agriculture – Ukrainian grain exports

The latest data from Ukraine’s Agriculture Ministry shows that grain exports so far in the 2024/25 season rose by 51% YoY to 8.9mt as of 18 September. This includes wheat exports of 5mt (+76% YoY) and corn shipments of 2.5mt (almost the same as last year). Farmers have already harvested 30mt of the grains.

Trade numbers from China Customs show that corn imports dropped 64% YoY (for a fourth consecutive month) to 430kt in August, while cumulative imports declined 15.7% YoY to 12.6mt in the first eight months of the year. China has already taken steps to protect farmers by limiting overseas purchases with domestic warehouses holding plenty of grain. For wheat, monthly imports fell 51% YoY to 410kt. However, cumulative imports are still up 9.8% YoY to 10.5mt in Jan’24-Aug’24.

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SAXO

Economic

Global Market Quick Take: Asia – September 19, 2024_1

Macro:

The FOMC cut rates by 50bps, taking the target for the federal funds rate to 4.75-5.00%. This came as a dovish surprise as markers had only priced in a 50bps move with 60% probability. The dot plot showed 2024 median rate forecast was revised down to 4.4% from 5.1%, which implies a further 50bps of easing from current levels. An additional 100bps of easing has been indicated for 2025 with the median long-term neutral rate higher once again at 2.875% from 2.75% in June but with higher dispersion in the dots.

However, one dissenter to the vote and Chair Powell’s press conference took away some of the dovish impact. Governor Bowman opted to vote for a smaller 25bp rate reduction. Fed Chair Powell used the press conference to stress that the Fed is not on a pre-set path and that no one should think that this is the new pace. He said that decisions will be taken on a meeting-by-meeting basis, noting the Fed can go quicker or slower, or even pause if it is appropriate. Powell remained upbeat on the economy despite signs of loosening labor market, indicating that the bigger rate cut comes from a position of strength. The clear message is that achieving a soft landing remains the Fed’s key objective and limited forward guidance will mean that markets remain volatile.

UK’s August inflation came in-line with expectations with the headline unchanged at 2.2% YoY but services rising to 5.6% YoY from 5.2% in July. The Bank of England decision is due today and there is unlikely to be any change in interest rates. However, the market is pricing in 50bps of rate cuts through to the end of the year and the central bank expects a pickup in headline inflation as well later in the year. This could make the BOE’s tone today to be one of a pushback to market expectations.

Macro events: Bank of England, Norges Bank, Australian Employment (Aug), US Initial Jobless Claims (w/e 14th Aug), Philadelphia Fed (Sep), Existing Home Sales (Aug)

Earnings: Factset, Endava, MoneyHero, FedEx, Lennar

Equities: US stocks ended a volatile session lower following the Fed's unexpected 50bps rate cut, its first since 2020 and double the anticipated 25bps. The S&P 500 and Nasdaq 100 each dropped 0.3%, while the Dow lost 102 points, even though it had gained over 375 points earlier in the day. Initial rallies in equities and bonds reversed after Fed Chair Powell reiterated the strength of the US economy and indicated no urgency for further easing, clarifying that today's substantial cut should not set a precedent. Despite this, FOMC projections suggest a total of 100bps in rate cuts this year, implying further 25bps reductions at each meeting in November and December. Among the large caps, Nvidia, Microsoft, Oracle, and AMD declined by over 1%, whereas Apple rose 1.8% and Meta hovered just above flat.

Fixed income: Treasuries couldn't maintain the gains from the Fed's unexpected 50 basis point rate cut, although the front end of the yield curve outperformed, making the curve steeper. Most gains were reversed during Fed Chair Powell’s press conference, where he clarified that half-point cuts shouldn't be the new norm. Front-end yields had risen by about 1 basis point after recovering from an almost 7 basis point drop, while longer-dated yields were up by 2 to 6 basis points. The curve-steepening move widened the 2s10s and 5s30s spreads by approximately 5 and 3 basis points, respectively. Fed-dated OIS contracts priced in around 70 basis points of cuts over the two remaining meetings this year, indicating at least one more half-point reduction. SOFR options activity suggested the unwinding of dovish bets as Powell dismissed extended half-point rate cuts. In July, total foreign holdings of US Treasuries rose for the third consecutive month, despite slight decreases in China’s and Japan’s stockpiles.

Commodities: Oil prices fell, with U.S. WTI crude down 0.39% to $70.91 per barrel and Brent crude down $0.05 to $73.65 per barrel, following an API report of rising U.S. crude and fuel inventories. The U.S. plans to buy up to 6 million barrels of oil to replenish the Strategic Petroleum Reserve. U.S. crude stocks rose by 1.96 million barrels, while gasoline and distillate inventories also increased. EIA data showed a 1.6 million barrel decrease in crude stocks, a 69,000 barrel increase in gasoline stocks, and a 125,000 barrel rise in distillate stocks. Gold prices rose $6.20 to $2,598.60, with futures hitting record highs post-FOMC rate cut before reversing in volatile trading. Gold prices dropped 0.41% to $2,558 after nearing a record high of $2,600, as investors reacted to the latest Federal Reserve decision. Further, silver fell 2.02% to $30.08.

FX: The forex markets saw choppy trading with the US dollar slipping significantly initially on the Fed’s jumbo rate cut but retracing the losses quickly after as the vote split and Powell’s comments weakened the dovish impact. In early Asian morning, the US dollar continues to trade higher, with Japanese yen weakening past the 143 level against the USD for the first time in ten days. Focus will turn to Bank of Japan announcement due on Friday where plans for further hiking could bring another leg of support for the yen. Kiwi dollar and British pound outperformed despite USD gains, given the extensive emphasis on a soft-landing target, and the latter faces its central bank decision due which could further reaffirm its resilience. Australian dollar also closed in gains and Aussie employment data is on the radar in the day ahead.

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FED

Remarks of Officials

Central Bank

On September 18, EDT, the FOMC decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. The statement shows:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional 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 is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Monetary Policy Statement

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TD Securities

Economic

Central Bank

The Federal Reserve Open Market Committee (FOMC) cut the target range for the federal funds rate by 50 basis points (bps), to 4.75% to 5.00% and announced it would continue its balance sheet runoff.

The Fed noted that it “has gained greater confidence that inflation is moving sustainably toward 2 percent”, and “judges that the risks to achieving its employment and inflation goals are roughly in balance.”

On the future path of policy, the statement repeated that “the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

The Fed’s Summary of Economic Projections was updated from June:

The median projection for real GDP growth was largely unchanged at 2.0% in 2024, 2.0% in 2025, 2.0% in 2026, and 1.8% over the long run;

The median unemployment rate forecast was raised to 4.4% in 2024, 4.4% in 2025, 4.3% in 2026, and 4.2% over the long run (from 4.0%, 4.2%, 4.1%, and 4.2%), respectively;

On inflation, the median estimate for core PCE was lowered to 2.6% in 2024, 2.2% in 2025, and 2.0% in 2026 (from 2.8%, 2.3%, and 2.0%);

The median projection for the fed funds rate was also lowered to 4.4% in 2024, 3.4% in 2025, 2.9% in 2026, and the long-run neutral rate was assumed to be 2.9% (from 5.1%, 4.1%, 3.1%, and 2.8%).

One FOMC member voted against the decision. Michelle W. Bowman preferred to cut the funds rate by a quarter point. That is the first dissent by a Fed governor since 2005.

Key Implications

Today was one of the most uncertain Fed decisions in recent memory. The central bank could have easily gone either way with this one. But given that it elected to go for an oversized 50 bps cut, it’s clear that the Fed has gained sufficient confidence that inflation is headed to 2%. It can now focus on the slowing job market, where the unemployment rate has been steadily rising.

Looking at the updated Fed member forecast, the “dots”, the median expectation is for only 50 bps in further cuts expected this year. This could be another 50 in November, or it could imply that the Fed will move to a slower path now that it has come out of the gates quickly, with a quarter point cut at each of the remaining meetings this year. From our point of view, the Fed’s current policy stance is still roughly 200 bps above where it needs to be given the state of the economy. This implies that, no matter the specific pace, investors should expect the Fed to keep cutting through the rest of this year and next.

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