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Macro views

What the Fed’s starting 50bps rate cut means

September 19, 2024 - 5 min read

At long last, we have our answer of 25 vs. 50. The Fed kicked off its much-anticipated easing cycle with a 50-basis-points (bps) cut, announcing the move at its September Federal Open Market Committee (FOMC) meeting. This now takes the range for the fed funds rate down to 4.75–5.00%.

No, the Fed doesn’t know something we don’t. No, this was not a hawkish 50 because equities and fixed income closed in the red. Fed Chair Jerome Powell threaded the needle perfectly for a benign 50 bper. Inflation is closing in on the 2% target, and unemployment has moved meaningfully higher as labor markets have normalized. And as a result, the balance of risks has completely flipped. It’s time to start moving back to neutral.

“The time to support the labor market is when it is strong,” stated Fed Chair Powell at the FOMC meeting press conference.

Kicking off the easing cycle with 50 was earned from both an economic and risk management perspective. Now we get to run back the debate all over again next month. But none of that really matters – the Powell Put is alive, and the strike price is rising. And that’s good for the economy and markets alike.

To be honest, for all the anticipation of this Fed meeting, it was a bit anticlimactic aside from the rate decision itself. Powell settled the debate, but he had already laid out the rationale at Jackson Hole – the statement and Summary of Economic Projections (SEP) simply confirmed this. The Fed has “gained greater confidence that inflation is moving sustainably back to two percent.” It is “strongly committed to supporting maximum employment.” And “the risks to achieving its employment and inflation goals are roughly in balance.” In short, inflation risks are skewed to the downside, unemployment risks are skewed to the upside, and the balance of risks has completely flipped. The Powell Fed has always been keenly focused on the positive externalities of maximum employment. And with inflation tracking back to target, it will not tolerate any further softening in labor market conditions.

By going 50, Powell was able to minimize the importance of the dot plot. The dots do indeed show another 50bps of cuts for 2024 and 100bps in 2025. But perhaps the most telling data from the SEP were the risk weightings. Those risk weightings clearly demonstrate how drastically the balance of risks has shifted for the committee since June. If anything, they still somewhat understate the skew of that balance.

The SEP now shows the unemployment rate moving up to 4.4% for 2024 and 2025, up from 4.0% and 4.2%, respectively, in the June edition. Even with that upward revision, the risks have completely flipped from the June SEP. Twelve of 19 committee members now see risks weighted to the upside from even those upwardly revised estimates.

 

Risks to unemployment rate
Risks to unemployment rate bar chart

Source: Bloomberg

 

Meanwhile, inflation risks are now broadly balanced after being skewed to the upside in June.

If there’s anything hawkish, it’s that the risks to inflation are likely skewed further to the downside relative to the median forecast than even the chart below shows, which means any cooling in inflation faster than forecasted should warrant incremental easing as well.

Risks to core PCE inflation bar chart

Source: Bloomberg

 

This is Powell’s Fed – he’s firmly in control. The recalibration has begun, and while the Fed is not on auto pilot, the recalibration will continue, guided by labor market data and that shifting balance of risks. Get ready for another six weeks of “25 or 50” debate. The opening odds are 35% for another 50 – any weak labor market data between now and then and we’re likely to see those odds on the rise. But just as with this decision, 25 vs. 50 really only transpose affects the short-term path for markets.

This next debate likely matters even less. Powell’s explicit defense of the labor side of the mandate is far more important. And after this meeting, there should be little doubt of his commitment to deliver on that objective. The Powell Put is alive and well.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers or any of its affiliates. The views and opinions expressed are as of September 19, 2024, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investors should fully understand the risks associated with any investment prior to investing.

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