The Federal Reserve has joined the easing cycle by reducing interest rates by 50 basis points (bps) to a range of 4.75%-5%. Only one committee member dissented, favouring a smaller 25bps cut. The Fed’s rate is now expected to fall to 4.4% by the end of the year, signalling an additional 50bps cut in 2024 and a further 100bps reduction in 2025. Headline inflation projections for 2024 and 2025 have been revised lower by 30bps and 20bps, respectively, while the 2024 growth forecast was reduced by 10bps to 2.1%, and the estimates for 2025 and 2026 were kept unchanged at 2%. These quicker rate cuts are expected to benefit both the economy and equities.
The accompanying statement reflected changes supporting this rate action. On inflation, the Fed noted that it has “gained greater confidence that inflation is moving sustainably toward 2%,” and that it now “judges the risks to its employment and inflation goals to be roughly balanced.” Additionally, the statement introduced new language, expressing a “strong commitment to supporting maximum employment.”
Key points from the press conference:
– Future decisions will be made on a meeting-by-meeting basis, relying on incoming data.
– The initial 50bps cut reflects confidence that inflation is trending toward 2%, though this does not suggest similarly aggressive rate actions will continue.
– The labour market will be closely monitored, as the current cut aims to maintain its strength.
– No recession indicators are evident at this time.
Changes in economic forecasts compared to June’s projections:
– GDP: Growth for 2024 was lowered to 2.1% (-10bps), with 2025 and 2026 growth unchanged at 2%, and 2027 growth projected at 2%.
– Unemployment rate: Revised higher to 4.4% (+40bps) in 2024, 4.4% (+20bps) in 2025, and 4.3% (+20bps) in 2026. The 2027 rate is projected at 4.2%.
– PCE inflation: Lowered to 2.3% (-30bps) for 2024, 2.1% (-20bps) for 2025, with the 2026 forecast unchanged at 2% and 2027 also at 2%.
– Core PCE inflation: Reduced to 2.6% (-20bps) for 2024, 2.2% (-10bps) for 2025, remaining at 2% for 2026 and 2027.
– Federal funds rate: Expected to decline to 4.4% (-70bps) in 2024, 3.4% (-70bps) in 2025, and 2.9% in both 2026 (-20bps) and 2027.
