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The FOMC surprised at least some in markets, including ourselves, kicking off their easing cycle with a 50bp rate cut – a move that sees the Fed funds target range falling to 4.75-5.00%.
That said, it looks unlikely that this move will be repeated in the coming months, barring a negative shock to the economy. As we see it, today’s decision is a tacit admission by the FOMC that they screwed up, and should have cut rates back in July. Indeed, when challenged on this point in the press conference, Chair Powell vacillated, before changing the subject. With this in mind, both the Summary of Economic Projections and Chair Powell’s commentary hinted towards a more gradual pace of easing going forwards.
We continue to look for 25bp cuts in both November and December before the FOMC slows to a pace of quarterly rate cuts in 2025.
Ahead of today’s decision, of the 113 economists surveyed by Bloomberg, only 9 had expected a 50bp cut. All but one of the remainder expected the FOMC to ease rates by just 25bps. Granted, labour market data has cooled in recent months with this prompting an acceleration of Fed easing bets, which assigned a roughly 50% chance of a jumbo cut today pre-announcement. But as we noted ahead of today’s release, this is still only consistent with economic normalisation rather than an indication of anything more sinister. This point was echoed by the Fed’s Williams and Waller too, speaking just prior to the blackout period. Both played down labour market fears, suggesting a preference for gradualism, normally Fed-code for moving in 25bp increments.
Despite a recent slowdown in payroll gains, the Beveridge curve suggests that the labour market has only just hit neutral, a point also highlighted by Chair Powell today
Working through the details of today’s announcement, changes to the policy statement were minor, but significant.
Perhaps unsurprisingly given today’s decision to begin easing policy, the statement noted that the FOMC “has gained greater confidence that inflation is moving sustainably toward 2 percent,” and that “risks to achieving its employment and inflation goals are “roughly in balance”. Unusually, however, Bowman failed to vote with the majority, the first such dissent in almost two decades.
More to the point, the statement failed to offer the sense of urgency that would ordinarily warrant an extra-large dose of policy easing.
This was similarly true of the latest SEPs. The median 2024 dot fell from 5.125% to 4.375%, indicating that a further 50bp of cuts are expected this year. Similarly, the 2025 median dropped from 4.125% to 3.375%, while the 2026 dot was also adjusted downwards from 3.125% to 2.875%. This implies cuts of 100bps next year, and 50bps the year after. The one hawkish adjustment came in the form of the long-run dots. The median climbed from 2.75% to 2.875%, with the mean now lying at just shy of 3%. Even so, while 18 of 19 FOMC members see two or fewer rate cuts by year-end, nine members see one cut or fewer, while two see none at all. We think two rate cuts should be the base case, for now, but this again suggests only a gradual pace of easing moving forward.
The dot plot saw significant, though not unexpected, downward revisions – pointing to a gradual pace of easing that largely met our pre-announcement expectations
Elsewhere in the SEPs, the FOMC’s GDP projections were little changed, subtracting just 0.1pp from expected growth in 2024, leaving the new projection at 2.0%.
Unemployment forecasts, however, saw significant revisions. The FOMC now sees unemployment at 4.4% in 2024, 4.4% in 2025, 4.3% in 2026, and 4.2% in the longer run. Back in June, they had projected unemployment to be at 4.0%, 4.2%, 4.1%, and 4.2% over the same time period. Similarly, headline and core PCE forecasts for this year and next were also revised sharply downwards. PCE fell from 2.6% and 2.3% in 2024 and 2025 respectively to 2.3% and 2.1%. Core PCE dropped from 2.8% and 2.3% to 2.6% and 2.2%. Longer run forecasts remained unchanged, with both headline and core PCE still seen settling at 2.0% in 2026. A back-of-the-envelope calculation suggests that this is roughly consistent with the new rate path, though not a sign of significant concern amongst policymakers in our eyes just yet.
With all this considered, the decision to trim rates by 50bps today looks puzzling.
That said, we think Chair Powell provided some answers on this point, albeit inadvertently. The press conference was an hour-long non-apology for failing to cut rates in the summer. Granted, Powell emphasised the need to normalise policy given slowing economic conditions. But he failed at any point to explain why 50bps was the right dose of easing, rather than 25bps. In fact, Powell even noted in his press conference that “there is nothing in the SEP that suggests that the committee is in a rush” emphasising that today’s cut is not an indication of the new pace for rate cuts. But Powell’s difficulty answering a question on whether the FOMC should have cut rates in July was telling in our view. In context, it suggests to us that the FOMC knows they should have cut in July, and they didn’t. And now they are trying to fix that mistake, while trying hard to make it looks like the July decision was not a screw-up.
While today’s announcement and subsequent commentary may well leave the Fed with egg on its face, markets are taking these developments in their stride.
Despite the FOMC cutting by more than expected, traders have marginally trimmed Fed easing bets, and the dollar is now stronger than pre-announcement levels. We think this trend could continue too. Closer alignment between markets and the Fed’s newly announced easing path should see further upside for the greenback.
Author:
Nick Rees, Senior FX Market Analyst