Today the Federal Open Market Committee (FOMC) ended intense speculation on the size of its rate reduction by announcing a 50-basis-point (bp) cut to achieve a target range for the fed funds rate of 4.75% to 5.0%. This was the first interest rate cut since March of 2020 at the onset of the pandemic.
The statement released by the committee was largely as expected with respect to the assessment of the Federal Reserve’s (Fed) dual mandate and the prevailing balance of risks. Inflation was characterized as remaining “somewhat elevated,” but recent progress has provided the committee with “greater confidence that inflation is moving sustainably toward 2 percent.” On the labor market, the committee focused on slowing job gains and a higher unemployment rate in continuing to make the case that risks to achieving either side of the dual mandate are now “roughly in balance.”
In the updated Summary of Economic Projections (SEP), the median FOMC member now calls for an additional 50 bps of rate cuts for the balance of 2024, matching the market’s pre-meeting consensus. However, nine out of 19 members projected just 25 bps (or fewer) in remaining cuts for 2024, likely fostering continued uncertainty around the precise path of policy rates through the balance of the year. Regarding the longer-run dot plot, the median estimate again ticked higher by a tenth of a percentage point to 2.9%, reflecting a broadening view that neutral policy rates may have increased relative to pre-pandemic assessments.
With the unemployment rate (UR) currently sitting at 4.2%, the year-end 2024 median projection for the UR was raised to 4.4%, indicating that further softening in the labor market is the base case for most committee members. But while connecting the median forecasts for policy rates to the forecasts for the unemployment rate, it’s likely that the committee would need to see a sizeable UR uptick to justify another 50-bp rate cut in 2024.
On the inflation front, year-end 2024 and 2025 projections were marked down modestly in response to softer-than-expected recent inflation data, and longer-term projections continue to expect a move back toward the Fed’s 2.0% target by the end of 2026. Real GDP projections moved modestly lower for 2024 and left unchanged for 2025 and beyond.
In the post-meeting press conference, prepared remarks from Fed Chair Jerome Powell were again largely in line with investor expectations in recent days. Powell acknowledged the overall greater comfort and progress made on inflation, a labor market that’s achieved better balance and an economy that continues to expand at a “solid” pace. On multiple occasions, Powell described the outsized 50-bp cut as a “recalibration” of policy, likely in an attempt to downplay expectations for 50-bp cuts moving forward and to better align market expectations with the outlook of the broader FOMC.
In a speech at last month’s annual Jackson Hole Symposium, Chair Powell emphatically declared that “The time has come for policy to adjust.” Today’s move was the first of many “adjustments” necessary to bring policy rates back toward neutral and how quickly we get there ultimately depends on the evolution of the incoming data. The recent moderation of inflation has allowed the Fed to place more weight on the full employment side of its dual mandate. Consequently, we remain highly focused on the incoming labor market data and the fine line between normalization and deterioration. Any further indication that the latter might be taking hold is likely to result in a more direct path to much lower yields. In the meantime, high quality spread sectors should enjoy the tailwinds that come from the start of a Fed cutting cycle.