A 50 basis point sharp rate cut! The Federal Reserve hints at another 50 basis point cut later this year, firmly supporting employment

Highlights:

The Federal Reserve cut interest rates for the first time in four years, with only one member of the voting committee opposing a 50 basis point cut. Bowman supported a 25 basis point cut, becoming the first Fed official to vote against the majority since 2005.

The resolution statement added a firm commitment to supporting full employment, expressed more confidence in inflation reaching the target, and changed the description of the risks to employment and inflation to be broadly balanced. It stated that when considering future rate cuts, data, outlook, and risk balance will be evaluated.

The resolution statement mentioned that employment growth has slowed down, inflation has made further progress, and reiterated that inflation remains somewhat high.

The dot plot shows that slightly more than half of the decision-makers expect at least a 25 basis point rate cut at each of the remaining two meetings this year.

The median forecast for interest rates by the Fed for the next two years has been lowered by 70 basis points compared to the previous forecast.

The GDP growth rate expectation for this year has been slightly lowered to 2.0%, while the PCE and core PCE inflation expectations have been slightly reduced to 2.3% and 2.6% respectively. The unemployment rate expectation has been raised to 4.4%.

The "New Fed News Agency" stated that the rate cut exceeded the expectations of most analysts a few days ago, signaling a new phase for the Fed in fighting inflation and aiming to prevent rate hikes from weakening the labor market.

Market reaction: Following the announcement of the resolution, the three major US stock indices hit daily highs, the two-year US Treasury bond yield plunged by over 10 basis points, gold surged over 1% to reach a historic high during trading, but later both US stock indices and gold turned lower.

As expected by the market, the Federal Reserve has initiated a period of easing, cutting interest rates for the first time in four years. What excited the market even more was that the Fed made an unusually large rate cut right from the start, and further emphasized the employment target in the resolution statement, reflecting its dual mandate.

On Wednesday, September 18th, the Federal Reserve announced after the FOMC meeting that the target range for the federal funds rate was lowered from 5.25%-5.50% to 4.75%-5.0%, a 50 basis point cut. This is the first rate cut since the Fed began its tightening cycle in March 2022. From March 2022 to July last year, the Fed raised rates 11 times in over a year, totaling 525 basis points. Since July last year, the Fed has kept rates unchanged at a high level after eight consecutive meetings.

The rate cut by the Federal Reserve this time was in line with expectations, with the magnitude of the cut surprising some market participants. While the market had anticipated a rate cut, there were differing views on the size of the cut. Prior to the Fed meeting, starting from last Thursday, senior Fed reporters from The Wall Street Journal and the Financial Times hinted at the possibility of a 50 basis point cut, leading to a significant increase in market expectations for a larger rate cut by the Fed. By the end of this Tuesday, the CME's tool showed that the probability of a 50 basis point rate cut by the Fed this week was 63%, up from 34% a week ago, while the probability of a 25 basis point cut decreased from 66% to 37%.

Journalist Nick Timiraos, known as the "New Fed News Agency," later wrote that the Fed's rate cut this time was even larger than what most analysts had expected a few days ago, firmly placing the Fed in a new phase of the inflation battle: the Fed is now trying to prevent past rate hikes from further weakening the US labor market Timiraos' article points out that a 50 basis point rate cut may reflect the Federal Reserve's so-called risk management considerations, where Fed officials weigh various economic risks such as rising inflation and unemployment, and make adjustments based on this. Officials hope to avoid a worsening situation where the labor market gradually cools down.

More than half of the decision-makers expect at least a 25 basis point rate cut in the remaining two meetings this year

The dot plot shows that compared to the last updated dot plot released by the Federal Reserve in June this year, this time Fed officials have significantly increased their expectations for rate cuts over the next three years.

The median expected interest rate for this year in the dot plot has dropped from 5.125% in the last update to 4.375%. For next year, 2025, the median interest rate has dropped from 4.125% to 3.375%, a decrease of 75 basis points. The median interest rate for the year after has dropped from 3.125% to 2.875%, a decrease of 25 basis points.

Among the 19 officials providing forecasts, all of them expect interest rates to be below 5.0% this time, compared to only eight people in the last update. Only two officials expect rates to be between 4.75% and 5.0%, 7 officials expect rates to be between 4.5% and 4.75%, 9 officials expect rates to be between 4.25% and 4.5%, and one official even expects rates to be below 4.5%, between 4.0% and 4.25%.

In other words, out of the 19 officials, a total of ten, accounting for nearly 53%, expect a combined rate cut of at least 50 basis points this year. More than half of the officials expect that in the remaining two FOMC meetings in November and December this year, there will be at least a 25 basis point rate cut in each meeting.

The chart below shows the changing trend of interest rate expectations among Fed officials reflected in the dot plot, with blue dots representing the September dot plot expectations and gray dots representing the June dot plot expectations.

Comparing the interest rate expectations for the next two years between the last and current dot plots, it is evident that Fed decision-makers have actually overturned all previous expectations.

The median interest rate forecast announced after the meeting by Fed officials shows that compared to the last outlook forecast in June this year, Fed officials have lowered their interest rate expectations for the next three years. The expected interest rate levels for the next two years have been lowered by 70 basis points, and by 20 basis points for the year after. Based on the median forecast, Fed officials expect a total rate cut of 50 basis points after the September rate cut, meaning there could be two 25 basis point rate cuts, indicating a total rate cut of 100 basis points within this year.

Specific median forecast values are as follows:

By the end of 2024, the federal funds rate is 4.4%, lower than the expected 5.1% in June of this year.

By the end of 2025, the federal funds rate is 3.4%, lower than the expected 4.1% in March.

By the end of 2026, the federal funds rate is 2.9%, lower than the expected 3.1% in March.

The federal funds rate by the end of 2027 is 2.9%.

The longer-term federal funds rate is 2.9%, higher than the expected 2.8% in March.

This Year's GDP Growth Rate Expectation and PCE Inflation Expectation Slightly Lowered, Unemployment Rate Expectation Raised

Although the dot plot shows a significant decrease in interest rate expectations, the economic outlook released after the meeting shows that Federal Reserve officials did not make significant adjustments to recent economic expectations. The GDP growth expectation for this year was slightly lowered by 0.1 percentage point, while the GDP expectations for the next two years remain unchanged. The unemployment rate expectation for this year was raised by 0.4 percentage points, and by 0.2 percentage points for the following two years. The PCE inflation expectation and core PCE inflation expectation for this year were lowered by 0.3 and 0.2 percentage points respectively, and by 0.2 and 0.1 percentage points for next year.

Specific forecasts are as follows:

• The GDP growth rate expectation for 2024 is 2.0%, down from 2.1% in June, with the expectations for 2025 and 2026 remaining at 2.0%, and 2.0% for 2027. The longer-term GDP growth rate expectation is 1.8%, unchanged from June.
• The unemployment rate expectation for 2024 is 4.4%, up from 4.0% in June, 4.4% for 2025 compared to 4.2% in June, and 4.3% for 2026 compared to 4.1% in June. The unemployment rate expectation for 2027 is 4.2%, with the longer-term expectation also at 4.2%, unchanged from June.
• The PCE inflation rate expectation for 2024 is 2.3%, down from 2.6% in June, 2.1% for 2025 compared to 2.3% in June, and 2.0% for 2026. The PCE inflation expectation for 2027 remains at 2.0%, with the longer-term expectation unchanged at 2.0%.
• The core PCE expectation for 2024 is 2.6%, down from 2.8% in June, 2.2% for 2025 compared to 2.3% in June, and 2.0% for 2026. The core PCE expectation for 2027 remains at 2.0%.

New Commitment to Supporting Full Employment, More Confidence in Inflation, Renamed Employment and Inflation Risks Broadly Balanced

In the post-meeting statement, the Federal Reserve stated that due to progress in inflation and risk balance, the FOMC decided to cut interest rates by 50 basis points. Compared to the previous meeting statement as of July 31, this time the Federal Reserve's decision statement made changes to interest rate guidance, evaluation of inflation, and economic activity.

The Fed revised its unchanged interest rate guidance since January, removing the phrase that had been repeatedly expressed in the past six months: "(FOMC) Committee expects that it is not appropriate to cut interest rates until there is more confidence that inflation is moving towards 2%." "

In addition to reiterating its commitment to bringing inflation down to the Federal Reserve's target of 2%, this decision added a part that emphasizes supporting full employment and avoiding risks in employment. The decision stated:

"(FOMC) is firmly committed to supporting full employment as well as bringing inflation back to the 2% target."

The decision stated that in considering "new" interest rate adjustments, the FOMC will carefully assess future data, evolving outlooks, and risk balances.

The previous meeting statement added a focus on the employment target, stating "Given the uncertain economic outlook, the (FOMC) committee is concerned about the two risks facing the dual mandate." This decision reiterated this statement.

At the same time, this decision added affirmation of progress on inflation, stating that "the committee is now more confident in inflation steadily moving towards 2%," and no longer reiterates "the risks of achieving employment and inflation goals continue to trend towards better balance," but instead changed to " the risks of achieving employment and inflation goals are broadly balanced".

Renamed employment growth has slowed, inflation has made further progress, reiterating inflation remains somewhat high

This decision modified the commentary on inflation. The previous decision stated: "Inflation has slowed somewhat over the past year but remains somewhat high. Some further progress has been made in achieving the inflation target." This decision stated: " Inflation has made further progress towards the committee's 2% target, but remains somewhat high."

This decision made adjustments to the assessment of the economic situation. The previous statement mentioned that employment growth had slowed, the unemployment rate had risen but remained low, while this time it stated "employment growth has slowed," maintained the assessment of the unemployment rate, and continued to reiterate that recent indicators show that economic activity continues to expand steadily.

Regarding the reduction of the Quantitative Tightening (QT) plan, this statement continues to use the wording from previous statements, stating that the FOMC will continue to reduce its holdings of U.S. Treasury securities, agency debt, and agency mortgage-backed securities (MBS).

Only one FOMC member opposed a 50 basis point rate cut, Bowman becomes the first Fed governor to vote against the majority decision since 2005

It is worth noting that the interest rate cut decision this time did not receive unanimous support from all FOMC voting members. The decision statement shows that among the FOMC voting members this time, 11 supported a 50 basis point rate cut, with only one member voting against it. Federal Reserve Governor Bowman, who voted against, advocated for starting a easing cycle with a small rate cut and supported a 25 basis point rate cut.

Bowman thus became the first Fed governor since 2005 to vote against the majority of FOMC members' decisions at an interest rate meeting.

Commentators noted that Bowman had been cautious about the slowdown in inflation. Until a month ago, she still believed so. In a speech on August 20, she stated that price increases were still above the Federal Reserve's 2% target and pointed out that rate cuts should be "gradual."

Some media outlets mentioned that before 1995, it was not uncommon for Federal Reserve governors to hold opposing views at meetings, but in the more than 90 dissents since then, the vast majority were from the Fed Chair. The Fed Chair usually seeks consensus on decisions, sometimes reaching compromises to avoid public opposition, as this could be seen as undermining their credibility.

" In addition, the media reported that the decision-making of the Federal Reserve's meetings rarely encounters objections, especially during Powell's tenure as chairman. The last time a voting FOMC member disagreed with the overall decision was in June 2022, when a regional Fed president voted against it. The then Kansas City Fed President George Esther advocated for a slight rate hike.

The red text below shows the deletions and additions in this decision statement compared to the previous one.

Market Reaction: US Stocks Rise, US Bond Yields Decline, Gold Rises

After the Federal Reserve's interest rate cut decision was announced, US stocks rose, US bond prices rebounded, yields declined, and gold rose.

The three major US stock indexes quickly expanded their gains and hit new daily highs. The Nasdaq, which rose more than 0.1% before the announcement, rose nearly 1.2% after the announcement; the S&P, which was slightly up before the announcement, rose nearly 1%; the Dow, which was roughly flat before the announcement, rose more than 370 points, up 0.9%. However, all three indexes quickly gave back some of their gains, and US stocks turned lower towards the end of the session.

Within less than 3 minutes after the announcement, the yield on the two-year US Treasury, which is sensitive to interest rates, plunged by over 10 basis points, dropping from above 3.64% to below 3.54%, while the benchmark 10-year US Treasury yield dropped from above 3.69% to below 3.64%, erasing earlier gains and turning negative during the day.

After the announcement, the spot gold, which was slightly above $2570 before the announcement, quickly rose above $2590, briefly surpassing $2600 when Powell's press conference was about to begin, setting a new intraday high record from Monday, rising nearly 1.2% during the day. However, it started to decline continuously after the press conference began, and US stocks turned lower at midday. New York gold futures also rose over 1% to a new high of $2627.2 during the session before turning lower.