And We're Off!

The Fed began the process of rate cuts today, and they came out not with a whimper, but with a bang, cutting rates by 0.5% (50 basis points). Following the June meeting, Fed members forecast it would be appropriate to cut rates once – by 25 basis points (bps) – in 2024. Three months on, they have already surpassed those expectations, and forecast further cuts before the year is through.

So what has changed? Today’s statement saw a number of alterations from the August meeting. Beyond the language surrounding today’s rate cut, the Fed tempered language around the labor market and were intentional in highlighting that they view the balance of risks between inflation and employment as now roughly equal. Meanwhile the committee has gained “greater confidence” that inflation is moving steadily toward its 2.0% inflation target, justifying today’s actions. It’s notable that there was a dissent in today’s vote – the first vote against a Fed action since 2005 – as Fed Board Governor Michelle Bowman preferred to cut rates today by 25 bps. That said, all nineteen voting members – including Bowman – forecast that rates should be cut to at least today’s level by year end.

Today’s statement was accompanied by updated economic projections from Fed members (the so-called “Dot Plots”) which were consistent with rate cuts. The unemployment rate is now expected to end the year at 4.4% (in June Fed members were forecasting 4.0%), while PCE inflation expectations have fallen from 2.6% on a year-ago basis down to 2.3%. Weaker employment growth and a faster moderation in inflation add to a more robust reaction from the Fed.