In what some on Wall Street were billing as “the most important Fed decision in years,” the Federal Reserve announced its first interest-rate cut in more than four years Wednesday afternoon. The move was the larger of two options likely under consideration.
In a press release and press conference from Fed Chair Jerome Powell following a two-day meeting of U.S. central bankers, the Fed said it was cutting its federal-funds target by 50 basis points, or half a percentage point. That brings the new range to between 4.75% and 5%.
At long last, the Fed is “pivoting”… or, as Powell repeatedly said in his press conference, “recalibrating” policy toward a more “neutral stance” from the inflation-fighting posture of the past few years.
It’s the first monetary “juice” the Fed is sending into the economy through lower interest rates since the central bank’s emergency cut to near zero in March 2020, during the onset of the pandemic.
The decision also acknowledges that the Fed thinks the risks of a slowing jobs market outweigh any concerns about high inflation. The Fed made this clear in its latest round of quarterly economic projections, released this afternoon.
The Fed now projects a 4.4% unemployment rate by the end of the year, up from its 4% guess just in June. As we’ve noted the past few months, the real world quickly eclipsed that prediction.
The central bankers now also expect the annual headline inflation rate to be lower than previously expected – 2.3% by year-end compared with 2.6% before – but for GDP to still grow by 2%.
Add it all up, and to them, that meant time to start cutting rates, and by 50 basis points compared to the 25-point choice also on the table. As Powell put it…
Our primary focus had been on bringing down inflation, and appropriately so… 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.
Powell also said this is just the start of a rate-cutting cycle.
All 19 Fed members who wrote down economic projections expect multiple rate cuts by the end of the year, the chairman said – to a median estimate of 4.4%, or half a percentage point lower. And more cuts next year will bring the rate to 3.4%.
The decision for a 50-basis-point cut was nearly unanimous, with one of the 12 voting members of the Fed, Michelle Bowman, preferring a smaller 25-basis-point reduction. That’s a rare “nonconsensus” decision, at least publicly, from the Federal Open Market Committee.
In the moments before the Fed’s 2 p.m. written announcement and statement, fed-funds futures traders had put 60% odds on a 50-point cut, and the major U.S. indexes were flat for the day.
By 2:01 p.m., the Russell 2000 Index was 2% higher, the tech-heavy Nasdaq Composite Index was 1.2% higher, the S&P 500 Index was up 1%, and the Dow Jones Industrial Average had risen a little less than 1%.
Those gains peeled back some in the time ahead of Powell’s press conference 30 minutes later, then bounced around until near the end of his responses to reporters’ questions.
The S&P 500 and other major indexes finished slightly lower.
Overall, the inconsistent action appeared appropriate because, as Powell spoke, the only clear thing was that the future scale of the Fed’s monetary policy is essentially a toss-up.
Powell said today’s move starts a rate-cutting cycle, but he didn’t seem convinced about anything beyond that.
[We’re] recalibrating our policy stance away from where we had it a year ago when inflation was high and unemployment low, to a place that’s more appropriate given where we are now and where we expect to be.
And that process will take place over time.
“We know, as I mentioned in my remarks, that the actual things that we do will depend on how the economy evolves.
We can go quicker if that’s appropriate. We can go slower if that’s appropriate. We can pause if that’s appropriate, but that’s what we’re contemplating.”
You can probably see that hanging on the Fed’s every word isn’t the best way to spend your time. However, tracking how the market reacts and how the economy is doing can be more helpful.
After all, it wasn’t long ago (at his previous press conference in July) that Powell said a 50-point cut was unlikely come September. Yet here we are.
Powell claimed the “U.S. economy is basically fine” at his press conference.
Yet the Fed wouldn’t lower its target rate range by 50 basis points if it didn’t think the economy needed it and/or that more weakness was ahead.
We’ve seen this idea play out in the markets on recent “bad news” days, but it could take some time for the general idea to creep all over the market.
Powell also faced a few direct questions about the idea that if the unemployment rate rises the way it has lately – and as the Fed projects will continue – it typically doesn’t just stop quickly. Powell avoided a direct answer but said, “This bears watching” and that…
“You can take this as a sign of our commitment not to get behind.”
Yet he also not-so-accidentally, but somewhat surprisingly, offered a comment that suggests he doesn’t think the labor market is in all that rough of a shape and why the unemployment rate might be rising. In a word: immigration. Mostly. Powell said…
“It depends on the inflows. If you’re having millions of people come into the labor force, and you’re creating 100,000 jobs, you’re going to see unemployment go up.”
It depends on what’s the trend underlying volatility of people coming into the country. We understand there’s been quite an influx across the borders, and that has actually been one of the things that has allowed the unemployment rate to rise. And the other is the slower hiring rate, which is also what we watch carefully.
It does depend on what’s happening on the supply side.
We’ll see how the market reacts to today’s decisions and commentary in the days ahead.
Here is a great summary of today’s FOMC by the Kobeissi Letter:
- Fed cuts interest rates by 50 bps for first time since 2020
- Fed sees 2 more 25 basis point rate cuts in 2024
- One Fed governor (Bowman) dissented for the first time since 2005 in favor of a 25-bps rate cut
- Fed gained “greater confidence” that inflation is moving to 2%
- Fed will “carefully assess incoming data” and evolve outlook
- Fed sees 100 bps of rate cuts in 2025 and 50 bps of cuts in 2026
The long awaited “Fed pivot” has officially begun.
However, not so fast in celebration-
The last 2 times the Fed’s first cut was 50+ bps:
Jan 3, 2001 – S&P 500 fell ~39% next 448 days which led to a recession
Sep 18, 2007 – S&P 500 fell ~54% next 372 days – Unemployment rose another 5.3% – Recession.
Yet, this is so very different than 2001 and 2008.
The tech bubble looks more like a tech correction.
And there is no real estate crash or mortgage debacle.
So, what happens at least for the rest of this week?
Perhaps we get the soft landing.
And perhaps stagflation becomes the newest mantra with a lot more easing on the table-or as I say on media:
Stagflation is a speed bump to recession.
Great Quotes
“The only way to keep your health is to eat what you don’t want, drink what you don’t like, and do what you would rather not.” – Mark Twain. (Not true btw. Just made me laugh)
Picture of the Week
Castle in Gifu, Japan
All content is the opinion of Brian Decker
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