Rates
- The FOMC announced today it will reduce the Federal Funds target rate by 50 basis points, its first cut since 2020. This brings the new Federal Funds target rate to a range of 4.75 – 5.00%. The decision was approved by a majority of the committee, but with a rare dissent from one member, Michelle Bowman, who favored a 25 basis point cut.
- Markets had broadly anticipated a rate cut at this meeting, but the sizing of the cut was an open question heading into today’s announcement. Despite data from CME FedWatch showing that markets were pricing in an 86% probability of a 25 basis point cut a week ago, investors had begun pricing in a higher probability of a 50 basis point cut in the latter part of last week. Just prior to the announcement, the CME data indicated markets were trading at a 55% probability of a 50 basis point hike. Such uncertainty ahead of an FOMC announcement has been historically rare and had not occurred in any prior FOMC meeting in the post-Covid era.
- Chairman Powell noted in his opening statement at the press conference that “This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained…” He also noted that the “labor market is in solid condition.”
- Despite the uncertainty going into the meeting, the market response was limited. A post-meeting rally in equities fizzled, and the S&P 500 closed the day down 0.29%. Short-duration Treasury yields ended the day lower, but rates on the long end of the curve increased. The 10-year US Treasury is now trading at a yield of 3.70%.
Economic Conditions
- Updates to the Fed’s Summary of Economic Projections overall suggest the Fed foresees mild economic cooling. Compared with the June projection, 2024 GDP estimates declined from 2.1% to 2.0%, with no change to GDP projections beyond 2024.
- The 2024 unemployment projection saw the largest change, rising to 4.4% as compared to the 4.0% estimate that was published in June. Projections for 2025 and 2026 also saw increases.
- The Fed continues to forecast declining levels of inflation, and the September projections reduced both PCE and Core PCE inflation estimates for 2024 and 2025. The Fed expects PCE inflation to reach the target 2% value by 2026.
- In its updated dot plot, the Fed forecast further rate cuts. A slim majority, ten out of nineteen participants, favor at least 50 basis points in additional cuts by the end of 2024. Median expectations for coming years suggest Fed officials anticipate a 3.4% Fed Funds target rate by the end of 2025, and 2.9% by the end of 2026.
The FOMC is next scheduled to meet November 6th– 7th 2024
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