Special Edition Market Note: The Federal Reserve Begins its Easing Cycle
By TRG Advisors on September 19, 2024
Fed Chair Jerome Powell Wednesday afternoon: “The U.S. economy is in a good place and our decision today is designed to keep it there… We want to return rates from a high level to become more normal over time.” We view this as pretty clearly stated and practical.
The Easing Cycle Begins. The Federal Reserve cut interest rates by a half point Wednesday, beginning its easing cycle towards a less restrictive policy rate. Headed into the meeting it was about a 50%/50% split between a 25 and 50 bps cut. We welcome the news – the economy is in a good place with GDP growth at 2.9% according to the Atlanta Fed Tracker, unemployment stands at 4.2% and inflation is pegged at 2.5%. 19 Fed governors expect further cuts ahead later this year. The Federal Funds Rate now sits at 4.75-5.00%, with the Fed stating it is strongly committed to supporting maximum employment and 2% inflation.
The committee adjusted its projections for a number of economic indicators. They boosted their expectation for unemployment, with the median forecast now at 4.4% for year-end relative to 4% in June. Median estimates are for 2% GDP growth through 2027, and inflation to be at 2.1% in 2025 and 2% in 2026 – very supportive for a soft landing.
Fed Chair Powell’s Remarks. Powell stated that economic activity continues to expand at a solid pace and growth is expected to continue its current trend into the end of the year. The Fed has growing confidence that strength in the jobs market can be maintained as it adjusts its policy rate. Conditions have continued to cool, with slightly higher initial jobless claims and lower monthly job gains, but the data is still far from recessionary levels.
Powell said that a 4.2% unemployment rate is a “very healthy unemployment rate” and any print in the low 4’s shows a good labor market. He noted that the upside risks to inflation have come down, but downside risks to employment have risen. The Fed remains attentive to the labor market and will swiftly act if any downturn is realized.
Similar to previously stated comments, Powell said policy decisions will be made on a meeting-by-meeting basis and that they are not on any preset course. He noted that the Fed’s dot plot is not a policy plan – it offers an assessment of what members are thinking today. The committee knows it is time to recalibrate its policy to something that is more appropriate, and Powell remarked that this is the beginning of that process. They will move as fast or as slow as they consider appropriate based on the data. Regarding quantitative tightening, they do not plan to stop the runoff – the balance sheet is shrinking to a more normal state along with lowering interest rates.
Importantly, Powell does not think the committee is behind the curve. He said its decision to cut rates by 50 bps today is a sign of commitment to not become behind the curve. The labor market is in solid shape, inflation is on its way to 2%, and Powell is focused on returning rates from their high level to a more normal level over time.
Chart 1: Fixed Income Markets Hint the Fed Has More Easing to Do[1]
[1] Source: FactSet. As of September 18, 2024.