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[News] Fed FOMC Summary: Fed Rate Cut by 50 bps, SEP Suggests Two More Rate Cut in 2024
The Federal Reserve held its FOMC meeting on September 18, announcing a 50-basis point cut to the federal funds rate, lowering it to a range of 4.75% to 5%. In its post-meeting statement, the Fed noted that the labor market had shifted from moderate growth to a slowdown, and its confidence in inflation returning to the target range had strengthened. Given the uncertainty surrounding the economic outlook and the balance of risks, the Fed decided to initiate a rate-cutting cycle, lowering rates by 50 basis points to support the U.S. job market.
In its Summary of Economic Projections (SEP), the Fed slightly revised down its 2024 economic growth forecast from 2.1% to 2.0%. It also raised the unemployment rate forecast from 4.0% to 4.4%, with unemployment expected to peak in 2025. Core inflation is projected to rise from 2.6% in June to 2.8%, with expectations for it to fall back to the target range by 2026.
The median of the Fed’s dot plot indicates that, assuming the economy develops as expected, interest rates will drop to 4.25% to 4.5% in 2024 (a total of 4 rate cuts) and to 3.25% to 3.5% in 2025 (another 4 rate cuts), with the long-term neutral rate projected to be between 2.75% and 3% (2 more cuts).
Overall, through this decision and economic forecast, the Fed aims to communicate to the market that while it acknowledges the weakening of the labor market, it remains committed to using appropriate rate cuts to support employment, while ensuring inflation stabilizes and economic growth continues.
Post-Meeting Press Conference Q&A Highlights
1. Labor Market
- Q: Historically, when the unemployment rate rises rapidly, it typically doesn’t stabilize quickly. However, the SEP data suggests that the unemployment rate will rise to 4.4% in 2024 and then stabilize. What is the mechanism behind this? What are the risks involved?
- A: Overall, the U.S. economy is growing steadily, inflation is gradually falling, and the labor market is returning to balance. The Fed’s goal is to maintain this status quo.
- Q: Over the past three months, the average monthly job gains were just over 100,000. Are you concerned about further deterioration in the labor market?
- A: This is mainly due to an increase in international migration, but the decline in job vacancies has also reduced overall job gains, which is the primary reason for the recent rise in the unemployment rate. Some FOMC members have considered the changes in the Beveridge Curve, noting that as job vacancies continue to fall, there may be a point where it directly converts to rising unemployment. We are likely approaching that point.
2. Inflation
- Q: With persistent housing inflation, is it still possible for overall inflation to return to 2%?
- A: Housing inflation has indeed been a drag on overall inflation. Although rental prices are falling slower than expected, as long as they remain low over the long term, it will eventually show in the overall inflation figures.
3. Interest Rate Adjustments
- Q: Recent labor market data has been significantly revised downward. Does this suggest that the Fed is behind in adjusting rates? Can we expect the Fed to maintain its current adjustment pace in the future?
- A: I do not believe the Fed is behind in adjusting rates. We have been taking timely, precautionary measures to respond to changes.
- Q: In the coming months, should we expect rate cuts of 25 bps or 50 bps?
- A: The SEP provides a reasonable reference, but the final rate adjustment will depend on economic performance. If the labor market weakens further, we may accelerate the rate cuts, and vice versa.
4. Balance Sheet Reduction
- Q: In 2019, the Fed halted its balance sheet reduction when it adjusted monetary policy. With this 50 bps rate cut, is there any indication that balance sheet reduction might stop as well?
- A: As of now, the Fed’s reserves remain sufficient. The balance sheet reduction has been primarily managed through the ON RRP (overnight reverse repurchase agreements). At this time, we are not considering halting the reduction. If rate cuts and balance sheet reduction are both seen as part of monetary policy normalization, then both can continue simultaneously for a period of time.
Comparison of the September and July FOMC Statements
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderat slowed, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some made further progress toward the Committee’s 2 percent inflation objective objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals continue to move into better are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goal light of the progress on inflation and the balance of risks, the Committee decided to maintain lower the target range for the federal funds rate at 5-1 by 1/2 percentage point to 4-3/4 to 5-1/2 percent. In considering any additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, 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 Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Austan D. Goolsbee Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Austan D. Goolsbee voted as an alternate member Voting against this action was Michelle W. Bowman, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.
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