Federal Reserve cuts rates by 'timely' 50bp, Bowman dissents

The US central bank surprised markets with a half percentage point interest rate cut.

However, rate-setters in Washington D.C. also emphasised that they would not necessarily continue to loosen policy at that same pace.

The target range for the federal funds rate was lowered by 50 basis points to 4.75-5.0%.

In his post meeting press conference, Federal Reserve president, Jerome Powell, emphasised that the jobs market remained near so-called "full employment" and as such now was the time to buttress it, not once it had weakened.

Hence his characterisation of the 50bp cut as "timely".

Hiring nevertheless had clearly slowed, Powell said.

So while he described the jobs market as "solid" the risks had increased, even as those for inflation were now more balanced.

Indeed, in its policy statement, the Federal Open Market Committee said it now had "greater confidence that inflation is moving sustainably toward 2 percent".

Yet the economic outlook was "uncertain".

For the first time since 2005, one FOMC member, governor Michele Bowman, dissented, voting instead for a 25bp cut.

In line with Powell's remarks, the Fed's top officials were anticipating modestly fewer rate cuts out to the end of 2025.

Their median projection was for around 200bp-worth of cuts to 3.4%.

That was less than the roughly 240bp of cuts that were being discounted in some financial markets ahead of Wednesday night's decision, although in June they had seen a median end-2025 rate of 4.1%.

The Fed's preferred inflation gauge, the core price deflator for personal consumption expenditures, was pegged to come in at 2.6% for 2024, 2.2% in 2025 and 2.0% in 2026, according to the median projection.

"The FOMC voted 11-1 to cut rates by 50 bps, with one member preferring to cut by a more moderate 25bps," said Kathleen Brooks, research director at XTB.

"This suggests that the doves have control at the Federal Reserve, and this may drive policy down the line."

Analysts at ING were in a similar frame of mind: "The US Federal Reserve wants to get to neutral quickly as it increasingly prioritises potential jobs weakness at a time when it is more comfortable with the inflation backdrop.

"We look for a further 150bp of cuts by next summer, but the risks are skewed towards the central bank doing more."

"The Fed doesn’t like to admit policy errors, but some of the decision for a larger initial cut is likely to get caught up as it found itself behind the curve by one meeting," was the take from Ryan Sweet, chief economist at Oxford Economics.

"[...] Though there was more uncertainty than usual heading into this meeting, the Fed appears to have avoided fanning additional policy uncertainty. The Fed isn't out of the woods as it remains data dependent. Therefore, markets will be on edge with every employment report."

For his part, Salomon Fiedler at Berenberg noted the spending promises made by the two presidential candidates in the US.

"More likely than not, the future president will have to govern with a divided congress, which could cut into their fiscal wish lists, dampening deficits somewhat. Either way, the Fed would need to watch like a hawk – the more expansionary fiscal policy is, the more the Fed would need to lean the other way."

Strikingly, Fed funds futures appeared to fall into lock step with the new rate projections, according to the CME's FedWatch Live tool.

As of 2136 BST, Fed funds futures were only pricing in 64% odds of another 25bp before the end of 2024, as opposed to the additional two or three cuts that had been priced-in beforehand, and a 83.4% probability of a year-end 2025 target range for the Fed funds rate of 3.50-3.75%, instead of 3.0-3.25%.