#MacroFriday: Fed opts for 50 bps rate cut

"The time has come for policy to adjust.” With these words, Fed Chairman Jerome Powell committed to cutting rates by the next meeting in his speech at Jackson Hole on August 23. He continued: “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” In recent weeks, markets speculated about the size of the cut, eventually settling on 50 basis points, while economists had been expecting a cut of 25 basis points.

On Wednesday, the Fed made its announcement. They began their path of cutting interest rates into less restrictive territory by reducing their key policy rate by 50 basis points to a range of 4.75%–5%. It appeared that Fed governors did a bit more in September because they did not cut in July. Powell indicated that if the committee had known a little earlier about the labor market data, which was released a few days after the meeting, they likely would have cut the policy rate in July. During the press conference, Powell said the size of the cut was appropriate to send a strong signal that the journey of reducing restrictiveness for the U.S. economy had begun. However, he emphasized that the economy is still in a good position with solid economic growth, a strong labor market, and inflation close to its 2% target.

So, what’s next? The September Fed meeting brought new economic projections and an updated dot plot showing the FOMC participants’ assessments of the appropriate target level for the Federal Funds rate at the end of the next few years. These estimates suggest the FOMC is looking for a total of 50 basis points of additional cuts in 2024 (likely 25 bp at each meeting), four 25 bp cuts in 2025, and another two 25 bp cuts in 2026. This would bring the Federal Funds rate to 3.1% by the end of 2026. Although they started with a significant cut, the dot plot indicates that more rate cuts are coming, but at a gradual pace. With the U.S. economy in a good place, the “Goldilocks” scenario still prevails in financial markets.