The Federal Reserve Jumpstarts the Easing Cycle with a Bigger Cut than Expected

It’s been clear for several weeks that the Fed was going to kick off its monetary easing cycle at this month’s meeting. But some doubts over the size of the rate cut lingered, with markets and forecasters split between a 25-point or a 50-point drop. In fact, pundits and politicians were pushing the Fed to make an even bigger move. Ultimately, the Fed’s monetary policy committee (FOMC) voted 11-1 to cut rates by half a percentage point. This is the first time it has cut rates since March 2020.

The FOMC statement announcing the decision observed that economic conditions haven’t changed much, aside from a slowdown in the labour market. But the Fed believes the latest inflation data has been promising. Both of these factors probably prompted the Fed to opt for a 50-point cut. There was one notable change to the FOMC statement: Back in July, the Fed stated that it was “strongly committed” to its inflation target. But this month’s statement added the goal of “supporting maximum employment” to that same sentence.

We don’t expect this to be the only rate cut for this year. The statement wasn’t clear on this point, but the projections made by FOMC members shed a little more light on the issue. During a press conference, Jerome Powell reiterated that the Fed isn’t “on any set course.” The FOMC projections nevertheless suggest rates will be 50 points lower by the end of the year. This means we can expect two 25-point cuts: one on November 7 and then another on December 18. They would be followed by four more 25-point cuts in 2025.

The Fed doesn’t believe the US economy is crashing or at risk of doing so. The slightly bigger-than-expected move isn’t a sign of panic. According to Jerome Powell, “The US economy is in good shape. It’s growing at a solid pace, inflation is coming down. The labor market is at a strong pace. We want to keep it there. That’s what we’re doing.”

This belief is reflected in the latest FOMC projections. The forecast for this year’s real GDP growth was almost unchanged, dropping by just 0.1 percentage points (from 2.1% to 2.0%) The change in projected unemployment compared to June was slightly bigger. Fed officials see 4.4% unemployment at the end of both this year (compared to the June forecast of 4.0%) and the next (June forecast of 4.2%). But they also anticipate that inflation will cool more than they expected three months ago. They predict that the year-on-year change in the Personal Consumption Expenditures deflator will amount to 2.3% in the fourth quarter of 2024 (previously 2.6%) and 2.1% at the end of next year (previously 2.3%). Core inflation for this year was also revised downward.

Jerome Powell reiterated that monetary policy remains restrictive. But he also said the Fed was ready to respond if the situation requires: “If the labour market were to slow unexpectedly, then we have the ability to react to that by cutting faster.” So it’s quite possible that if upcoming economic readings, especially job numbers, turn out to be disappointing, the Fed may opt for more 50-point cuts.