The Federal Reserve's recent 0.5% rate cut, reducing the federal funds rate to 4.75-5.00%, aligns with market expectations derived from the CME's Fed Funds analysis, though it surprised many analysts who had anticipated a smaller cut.
The revised dot plot suggests another 0.5% cut by year-end, with further reductions of 1% projected for 2025. The long-term neutral rate was also adjusted slightly higher to 2.875%.
This decision signals growing economic uncertainty, even amid strong Q3 GDP growth. While some sectors remain resilient, others face difficulties due to high interest rates. Chair Powell emphasised that future rate decisions will be made on a meeting-by-meeting basis, reflecting a data-driven approach to policy. His optimism about the economy contrasts with mixed signals from the labour market and other sectors, adding to the complexity of the policy environment.
One notable aspect of the FOMC meeting was the split vote, with Governor Michelle Bowman dissenting in favour of a smaller 0.25% cut. This marked the first dissent by a Fed Governor since 2005, underscoring the challenges of post-pandemic policymaking and the increasingly fractured nature of the Fed's decision-making process.
This development followed the Fed’s earlier decision to cut interest rates by 50 bps, a larger-than-usual reduction amid growing concerns about the health of the U.S. labour market.
Fed Funds Futures are now pricing in more cuts before the end of the year, with expectations of a 25bps move in November followed by another 25bps in December. Goldman Sachs also adjusted its forecast, now predicting 0.25% cuts at the Fed’s meetings in January, March, May, and June of 2025, reflecting a shift in its prior outlook of quarterly reductions.
This significant rate cut creates an intriguing scenario, where economic conditions are balanced to support growth without triggering a recession. Powell reiterated that these cuts are intended to maintain economic momentum rather than signal weakness. For investors, this could translate into a favourable environment for equities and other risk assets, as the Fed navigates the fine line between supporting growth and managing inflation.
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