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Written by: Stephanie Aliaga
In a highly anticipated decision, the FOMC voted to lower the federal funds rate by 50 basis points to a target range of 4.75%-5.00%, a larger-than-expected move and their first move lower since March 2020. In his press conference, Powell repeatedly described the move as a policy “recalibration”, suggesting the Fed is proactively managing economic risk.
Among the highlights:
- Changes to the statement language were largely expected: job gains have “slowed” (vs. “moderated”), the Fed has “greater confidence that inflation is moving sustainably towards 2%”, and risks to achieving its dual mandate are “roughly in balance”. Language on the economic backdrop did not change meaningfully: unemployment remains low, inflation somewhat elevated and the Fed is attentive to risks on both sides of its mandate. In a highly rare fashion, the statement included 1 dissent from Michelle Bowman, preferring a 25bps cut, the first dissent by a governor since 2005.
- The dot plot showed little change in the totality of rate cuts expected to be delivered over the next few years, although the path was pulled forward. The median projection now shows another 50bps worth of cuts over the remaining two meetings of the year, followed by 100bps in 2025 and 50bps in 2026. This suggests the federal funds rate would reach “neutral” by the end of 2026, and that neutral rate ticked higher to 2.9% from 2.8%.
- The updated economic projections leaned dovish. Inflation projections were revised lower while the unemployment rate for this year and next year nudged higher to 4.4%, increased by 0.4% and 0.2%-pts respectively. Growth projections were largely unchanged.
- In the press conference, Powell struck a cautiously upbeat tone on the economy, acknowledging the slowdown in labor market conditions but pointing to the broader set of indicators that still show the labor market is on stable footing. Interestingly, Powell suggested that the committee may well have cut rates in July if they had the July Jobs Report in hand, likely adding to the Fed’s resolve to normalize policy at this meeting.
In sum, policy normalization has now begun, more cuts are coming and despite a slightly larger cut to begin with, easing will still be gradual (barring a more material slowdown in the economy). Chair Powell reiterated confidence in economic conditions but with continued attention to labor market conditions. As we have communicated previously, we think it is a slippery slope to ease policy quickly at the risk of stoking recession fears. With a 50bp cut, Powell needed to convince markets that they are not worried about recession, and so far, they may have succeeded.
In response to this decision, markets saw mixed and choppy price action. Equities finished mostly lower with defensives lagging, cyclicals outperforming and tech mixed. Short term yields fell while the curve steepened and markets moved to price in roughly 70bps of cuts in the remainder of the year.
Beyond immediate price action, this outcome of Fed rate cuts in the context of a soft landing should bode well for both stock and bond markets. However, investors may still focus on enhancing quality and diversification in portfolios as economic uncertainties loom and market concentration risks remain.
Federal funds rate expectations and updated FOMC projections
FOMC and market expectations for the federal funds rate
Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management.
Market expectations are based off of USD Overnight Index Swaps. *Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Forecasts are not a reliable indicator of future performance. Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections or other forward-looking statements, actual events, results or performance may differ materially from those reflected or contemplated.
Guide to the Markets – U.S. Data are as of September 18, 2024.
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