Raymond James
Markets & Investing
September 18, 2024
The half-percentage point reduction at the September 17-18 FOMC meeting represents the largest non-COVID era cut by the Fed since 2008.
The Federal Reserve (Fed) cut interest rates for the first time in over four years, moving its benchmark rate 0.50% lower to support the labor market, while working toward its 2% inflation target.
The much-anticipated announcement came on September 18, at the conclusion of the two-day Federal Open Market Committee (FOMC) meeting. The rate cut lowers the federal funds target range to 4.75%-5.00%, and excluding COVID-era cuts, is the largest reduction by the Fed since 2008.
“The Fed’s policy shift is clear: Its focus is squarely on economic growth, particularly employment conditions, and less on inflation,” said Raymond James Chief Investment Officer Larry Adam.
In addition to the meeting decision, the FOMC released its updated Summary of Economic Projections (SEP) and dot plot, where it forecasts up to another 0.50% of cuts by the end of 2024 and up to a full percentage point of decreases in 2025. For over a year, the FOMC held the benchmark federal funds rate at 5.25%-5.50%, following its last rate hike in July 2023.
“Interestingly, the Fed’s GDP forecast is almost unchanged compared to the June forecast while the inflation forecast came in lower,” noted Raymond James Chief Economist Eugenio Alemán. “Meanwhile, the forecast for the rate of unemployment was higher than in June. It seems that the Fed believes that the labor market will not continue to deteriorate much from where we are now, as it expects the unemployment rate to stay at 4.4% in 2025.”
The Fed’s GDP growth forecast on a year-over-year basis remained almost unchanged. In the June projection, the SEP expected growth was 2.1% while the new forecast expects growth of 2.0%, with 2025 and 2026 remaining at 2.0% for the median forecast.
The SEP rate of unemployment was a bit higher, at 4.4% in 2024, compared to June’s projection for a 4.0% rate. The Fed also expects an unemployment rate of 4.4% in 2025, up from 4.2% in June. For 2026, it expects the rate of unemployment to drop to 4.3% versus the 4.1% estimate in the June SEP.
“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation,” said Fed Chair Jerome Powell in his post-meeting press conference.
Powell also noted that no one should look at the 0.50% cut as “the new pace.” The message from the Fed’s projected dot plot is that while the Fed will remain data dependent, the path of the fed funds rate will be fairly profound over the rest of 2024, 2025 and 2026 – taking the federal funds rate midpoint from the 5.38% prior to today’s meeting to 2.9% at the end of 2026.
“The number and size of rate cuts is less important than the actual impact lower interest rates have on the economy,” said Adam. “If the economy averts a recession, the equity market should maintain its upward path as earnings continue to grow. This is the first step in the Fed attempting to engineer a soft landing and preserve the current economic expansion, which should be, long term, market friendly.”
The next FOMC meeting takes place November 6-7.
All expressions of opinion reflect the judgments of the Raymond James Chief Investment Officer and Raymond James Chief Economist and are subject to change.
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