What the Fed’s starting 50 bps rate cut means
9月 19, 2024
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5 min
At long last, we have our answer of 25 vs. 50. The Fed kicked off its much-anticipated easing cycle with a 50-basis-point cut, announcing the move at its September Federal Open Market Committee (FOMC) meeting. This now takes the range for the fed funds rate down to 4.75-5.00%.
No, the Fed doesn’t know something we don’t. No, this was not a hawkish 50 because equities and fixed income closed in the red. Fed Chair Jerome Powell threaded the needle perfectly for a benign 50 bper. Inflation is closing in on the 2% target, unemployment has moved meaningfully higher as labor markets have normalized. And as a result, the balance of risks has completely flipped. It’s time to start moving back to neutral.
“The time to support the labor market is when it is strong,” stated Fed Chair Powell at the FOMC meeting press conference.
Kicking off the easing cycle with 50 was earned from both an economic and risk management perspective. Now we get to run back the debate all over again next month. But none of that really matters – the Powell Put is alive and the strike price is rising. And that’s good for the economy and markets alike.
To be honest, for all the anticipation of this Fed meeting, it was a bit anticlimactic aside from the rate decision itself. Powell settled the debate, but he had already laid out the rationale at Jackson Hole – the statement and Summary of Economic Projections (SEP) simply confirmed this. The Fed has “gained greater confidence that inflation is moving sustainably back to two percent.” They are “strongly committed to supporting maximum employment.” And “the risks to achieving its employment and inflation goals are roughly in balance.” In short, inflation risks are skewed to the downside, unemployment risks are skewed to the upside, and the balance of risks has completely flipped. The Powell Fed has always been keenly focused on the positive externalities of maximum employment. And with inflation tracking back to target, they will not tolerate any further softening in labor market conditions.
By going 50, Powell was able to minimize the importance of the dot plot. The dots do indeed show another 50 bps of cuts for 2024 and 100 bps in 2025. But perhaps the most telling data from the SEP were the risk weightings. Those risk weightings clearly demonstrate how drastically the balance of risks has shifted for the committee since June. If anything, they still somewhat understate the skew of that balance.
The SEP now shows the unemployment rate moving up to 4.4% for 2024 and 2025, up from 4.0% and 4.2%, respectively in the June edition. Even with that upward revision, the risks have completely flipped from the June SEP. Twelve of 19 committee members now see risks weighted to the upside from even those upwardly revised estimates.