The boosters got what they wanted from the Fed — a half a per cent rate cut straight up — and they could get another half a per cent by the end of 2024. However, this could turn out to be something the rate cut bulls didn’t want to see so quickly.
This caused both the bulls and more restrained investors to reconsider the outsized cut. Half a per cent cuts are typically made when the broader economy is looking a bit uncertain, and Wall Street reacted negatively.
The Dow was up 375 points following the cut at 2 p.m. U.S. Eastern Time (4 a.m. here). By the close at 6 a.m. here, it was down more than 100 points and no longer looking so confident.
The S&P 500 and the Nasdaq followed a similar trend, both ending the day in the red. Investors and analysts started questioning the necessity of such a large cut and wondered what the Fed might not be revealing.
The Fed cut its key Federal Funds Rate to a range of 4.75% to 5.0%, with one dissenting vote from Governor Michelle Bowman, who favoured a 0.25% reduction.
Jay Powell clarified in his post-meeting press conference that the half a per cent cut was aimed at preventing a surge in unemployment.
“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that sometimes accompanies disinflation,” Powell said.
He also urged investors to view the Fed’s 50 basis-point cut as a strong commitment to achieving that goal.
Powell downplayed concerns of an economic downturn.
“I don’t see anything in the economy right now that suggests the likelihood of a recession, or rather, of a downturn, is elevated,” he said.
“You see growth at a solid rate, inflation coming down, and a labour market that remains strong. So, I don’t see that risk now.”
He emphasised that the labour market is in good shape.
“Our policy move today is intended to keep it that way,” he added.
There will likely be at least two more cuts this year, amounting to another half a per cent reduction by the year's end. The so-called "dot plot" indicated that 19 Federal Open Markets Committee members, both voters and non-voters, anticipate the Federal Funds Rate will be at 4.4% by the end of the year, which corresponds to a target range of 4.25% to 4.5%.
The Fed’s two remaining meetings for the year are scheduled for November 6-7 and December 17-18.
By 2025, the central bank forecasts interest rates to settle at 3.4%, signalling another full percentage point in cuts. By 2026, rates are expected to drop to 2.9%, with another half-point reduction.
“There’s nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to complete this process,” Powell said.
“This process evolves over time,” he added.
With this half a per cent cut, the rate reduction cycle has begun.
