The Federal Reserve Open Market Committee (FOMC) cut the target range for the federal funds rate by 50 basis points (bps), to 4.75% to 5.00% and announced it would continue its balance sheet runoff.
The Fed noted that it “has gained greater confidence that inflation is moving sustainably toward 2 percent”, and “judges that the risks to achieving its employment and inflation goals are roughly in balance.”
On the future path of policy, the statement repeated that “the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
The Fed’s Summary of Economic Projections was updated from June:
- The median projection for real GDP growth was largely unchanged at 2.0% in 2024, 2.0% in 2025, 2.0% in 2026, and 1.8% over the long run.
- The median unemployment rate forecast was raised to 4.4% in 2024, 4.4% in 2025, 4.3% in 2026, and 4.2% over the long run (from 4.0%, 4.2%, 4.1%, and 4.2%), respectively.
- On inflation, the median estimate for core PCE was lowered to 2.6% in 2024, 2.2% in 2025, and 2.0% in 2026 (from 2.8%, 2.3%, and 2.0%).
- The median projection for the fed funds rate was also lowered to 4.4% in 2024, 3.4% in 2025, 2.9% in 2026, and the long-run neutral rate was assumed to be 2.9% (from 5.1%, 4.1%, 3.1%, and 2.8%).
One FOMC member voted against the decision. Michelle W. Bowman preferred to cut the funds rate by a quarter point. That is the first dissent by a Fed governor since 2005.
Key Implications
Today was one of the most uncertain Fed decisions in recent memory. The central bank could have easily gone either way with this one. But given that it elected to go for an oversized 50 bps cut, it’s clear that the Fed has gained sufficient confidence that inflation is headed to 2%. It can now focus on the slowing job market, where the unemployment rate has been steadily rising.
Looking at the updated Fed member forecast, the “dots”, the median expectation is for only 50 bps in further cuts expected this year. This could be another 50 in November, or it could imply that the Fed will move to a slower path now that it has come out of the gates quickly, with a quarter point cut at each of the remaining meetings this year. From our point of view, the Fed’s current policy stance is still roughly 200 bps above where it needs to be given the state of the economy. This implies that, no matter the specific pace, investors should expect the Fed to keep cutting through the rest of this year and next.
