The Federal Reserve implemented its first rate cut in four years, lowering the target range for the federal funds rate by 50 basis points to 4.75%-5%. This decision marks a significant shift in monetary policy, which Fed Chairman Jerome Powell described the move as a “recalibration” while some others said that meant the Fed was playing catch-up and should have cut rates in July by 25 basis points.
Key takeaways from the Fed’s decision
• Additional rate cuts expected: The Fed’s updated forecasts indicate at least two more 25-basis-point cuts are likely in 2024, potentially bringing the range down to 4.25%-4.5% (four rate cuts in 2025 and two rate cuts in 2026).
• Economic outlook: Fed officials project slightly slower economic growth, higher unemployment, and lower inflation compared to their June forecasts (see table below).
• Dissenting opinion: The decision was not unanimous, with Fed Governor Michelle Bowman favoring a smaller 25-basis-point reduction.
Powell’s remarks.
Chairman Powell emphasized that this recalibration does not indicate a predetermined path for future decisions. He stated, “We will continue to make our decisions meeting by meeting,” and stressed that the Fed is prepared to adjust its approach based on economic developments.
Powell also addressed concerns about political motivations, asserting that the Fed’s decisions are solely based on what’s best for the economy and the American people.
Market impact and future outlook
• The Fed’s decision aligns with recent market expectations, which had shifted dramatically in favor of a larger cut.
• While this move signals the Fed’s commitment to engineering a soft landing for the U.S. economy, Powell cautioned against assuming similar large cuts in the future.
Bottom line: The Fed remains data-dependent in its approach to monetary policy, with Powell noting that the economic outlook is uncertain, and the committee is attentive to risks on both sides of its dual mandate.