The Federal Reserve (Fed) has initiated its rate-cut cycle with a jumbo reduction. After keeping the federal funds rate at a two-decade high for over a year, the Fed lowered rates by 50 basis points, bringing them down to the 4.75-5% range.Â
Before the decision, the markets were uncertain about the extent of the rate cut. However, the Fed's move aligned with the 50 basis points cut, which had been priced with a 65% probability in the futures markets.Â
The decision passed with a vote of 11 to 1. Fed Governor Michelle Bowman was the sole dissenter, voting in favor of a 25 basis point cut. This marked the first dissenting vote by a Fed governor since 2005.Â
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Fed Adjusts Language on Policy Path, Highlights Dual Mandate CommitmentÂ
Upon reviewing the statement, some notable shifts in emphasis stand out. While the July statement stressed that rate cuts would not be appropriate until there was greater confidence that inflation was moving sustainably toward the target, the new statement revises this to indicate that more confidence has been gained in inflation's progress toward the target. Additionally, the statement now mentions that the risks to achieving the employment and inflation objectives are deemed roughly balanced.Â
Furthermore, while the July statement emphasized a strong commitment to returning inflation to the target, the new statement adds a strong commitment to supporting maximum employment alongside inflation. Finally, it is noted that incoming data and the balance of risks will be carefully evaluated when assessing further adjustments.Â
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Fed Revises Economic Forecasts, Signals Path to Lower Interest RatesÂ
The economic projections, along with the dot plot, have outlined the Fed officials' projections for the policy path. The projections show that 10 out of 19 officials support lowering rates by at least another half a percentage point in the remaining two meetings of 2024. Seven officials favor a further quarter-point cut this year, while two do not support any further cuts.Â
Additionally, the quarterly economic forecasts were updated. The median projection for the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, was lowered from 2.6% in June to 2.3% for the end of 2024, while the forecast for core PCE was reduced to 2.6%. The projections indicate that Fed officials still do not expect inflation to return to the 2% target until 2026.Â
As for the unemployment rate, the median forecast was raised from 4% in June to 4.4%. The August unemployment rate came in at 4.2%; the new forecast indicates that officials anticipate some further cooling in the labor market.Â
What’s Next for the Fed? Future Policy Moves Under ScrutinyÂ
In his post-decision remarks, Fed Chair Jerome Powell stated that if the economy remains strong, they could slow the pace of cuts. Still, if the labor market deteriorates, they will respond accordingly. However, Powell also made it clear that this decision does not indicate the pace of future cuts. Besides, when reviewing the dot plot, suggests that the Fed intends to make rate cuts gradually, implying that the 50 basis point cut was a preemptive move to support the labour market.Â
However, the Fed's aggressive move has led markets to expect more rate cuts. Markets are now pricing in 70 basis points of cuts for the remainder of the year. The emphasis on labor market developments regarding the pace of cuts highlights that upcoming U.S. labor data will remain critical in shaping market expectations.Â
Note: The information provided is for educational and informational purposes only. It's crucial to understand and evaluate the risks before making any investment decisions.