TLDR:
- Fed cuts interest rates by 50 basis points, first cut since 2020
- Powell argues Fed is not “behind” in cutting rates
- Some economists think Fed is being reactive rather than proactive
- Wall Street expects more future cuts than Fed projections
- Fed faces challenges in managing internal divisions and market expectations
The Federal Reserve has taken a significant step in its monetary policy by cutting interest rates for the first time since 2020.
On Wednesday, September 18, 2024, the central bank announced a 50 basis point reduction in its benchmark interest rate, bringing it to a range of 4.75-5 percent. This move marks the beginning of an easing cycle as the Fed attempts to navigate a complex economic landscape.
Fed Chairman Jerome Powell emphasized that this decision was not a reaction to being “behind” the curve, but rather a timely adjustment to support the economy.
“We don’t think we’re behind,” Powell stated during the press conference following the announcement. “We think this is timely, but I think you can take this as a sign of our commitment not to get behind.”
The rate cut comes as the Fed faces the challenge of maintaining economic growth while keeping inflation in check. Recent data has shown a cooling job market, with the unemployment rate rising to 4.2% in August. The Fed’s decision aims to prevent further deterioration in employment while continuing to make progress on inflation.
Some economists, however, argue that the Fed’s actions are more reactive than proactive. Gregory Daco, Chief Economist at EY, suggested that the central bank should “adopt a robust forward-looking framework and abandon data dependency.”
This criticism stems from the fact that Powell acknowledged the Fed might have cut rates in July if they had seen that month’s employment figures earlier.
The Fed’s projections indicate two more 25 basis point cuts through the rest of 2024, followed by four smaller cuts in 2025.
However, many Wall Street analysts expect a faster pace of rate reductions. JPMorgan Chase chief economist Michael Feroli anticipates a 50 basis point cut at the next meeting in early November, contingent on further softening in upcoming jobs reports.
The central bank’s economic outlook remains relatively optimistic. Officials predict the economy will expand at 2% this year, with inflation expected to end the year at 2.6%, down from the previous forecast of 2.8%. The unemployment rate is projected to tick up to 4.4% this year and hold at that level through next year.
Internal divisions within the Fed are becoming apparent. The rate-setting committee is almost evenly split on the number of additional rate cuts expected this year.
Seven policymakers favor one additional 25 basis point cut before year-end, while nine members support 50 basis points of additional easing. Two policymakers expect no more rate cuts this year.
This division was further highlighted by the dissenting vote of Fed governor Michelle Bowman, who argued for a smaller quarter-point cut. Her dissent was the first for the Fed since 2005, underscoring the challenges Powell faces in building consensus among committee members.
The Fed’s decision has been met with mixed reactions in the financial markets. While major stock benchmarks and government bonds ended the day of the announcement relatively unchanged, US stock futures rose the following day, as did indices in Asia and Europe.
Peter Hooper, vice-chair of research at Deutsche Bank, described the move as “innovative” and “taking out some insurance to prolong what is a very good place to be in the economy.”
However, some economists warn that the easing cycle could be more limited than financial markets expect, given the uncertain outlook for inflation.
As the Fed embarks on this new phase of monetary policy, it will need to carefully balance its dual mandate of maximum employment and price stability. The central bank’s ability to navigate these challenges while managing market expectations and internal disagreements will be crucial in the months ahead.
With the presidential election approaching, the Fed’s actions will undoubtedly face scrutiny. Powell reiterated that Fed decisions would be made solely based on economic data, emphasizing the central bank’s commitment to independence from political considerations.
