This week the Federal Reserve announced a 50bps interest rate cut taking the Fed Funds Target rate to 4.75 – 5 percent, the first cut in over four years, and signaling that the easing cycle has commenced. The announcement was one of the most anticipated and talked about in recent history.
Coming off the back of sticky inflation, a softening labor market, and persistent global macro and political volatility, the market’s anxiety for a soft landing was apparent – you could cut the tension with a knife. Many analysts were arguing for a 25pbs cut and notably, including Fed governor Michelle Bowman who dissented on the size of the cut, the first since 2005.
Michael P. Reinking, CFA, a senior market strategist at the New York Stock Exchange said, “Coming into the Blackout Window part of the reason I had originally thought the Committee would move 25bps was that it typically likes to move methodically with clear messaging to the market.”
Adds Reinking, “One of the risks to not messaging a larger cut in advance was that this would have caused volatility in currency markets, which if you rewound the clock to the beginning of August, was at the epicenter of the volatility with the unwind of carry trades. However, well placed comments from former Fed officials in the media late last week addressed that concern increasing the odds of a larger cut.”
Jerome Powell, the Fed Chair commented in Wyoming last month, “We will do everything we can to support a strong labour market as we make further progress towards price stability.”
Many market analysts are predicting one further base rate cut in 2024 and for interest rates to fall to around 4 percent by the end of 20225. The Fed’s 2025 median projection is for an additional 100bps of cuts to 3.4 percent. Officials see rates back to neutral in 2026 at 2.9 percent with the longer run estimate also ticking higher again.
