With the market roughly split between 25bps and 50bps, the Federal Open Market Committee (FOMC) voted to reduce the federal funds rate target range by 50bps to 4.75% – 5.00%. There was one dissent in favor of a 25bp rate cut.

Changes to the FOMC Statement:

• The economic assessment was amended to recognize job growth has “slowed” vs. merely “moderated.”
• The statement recognized that the committee has now gained greater confidence on inflation returning to target.
• The risks to employment and inflation are now in balance vs. previously it was tilted more toward inflation.
• In light of the recent inflation numbers and balance of risks shifting further to employment, the statement added a phrase that they are also strongly committed to “supporting maximum employment” as opposed to just returning inflation to 2%.

Summary of Economic Projections:

• The dot plot gave us a refreshed view of the Committee’s expectation for the path of the Fed Funds rate.
  • The median member expects the policy rate to fall to 4.375% by year-end 2024 which is equivalent to an additional 50bps of rate cuts this year.
  • The median member expects an additional 100bps of cuts in 2025 and 50bps of cuts in 2026 which would put the policy rate at 3.375% by year-end 2025 and 2.875% by year-end 2026.
  • The long run dot shifted higher again to 2.875%. In recent months, Fed members have discussed the possibility that the neutral policy rate (also referred to as R*) is higher than previously anticipated.
• Investors also received FOMC participants’ revised outlooks for employment, growth, and inflation:
  • The Core PCE inflation forecasts were revised modestly lower, with 2024 down to 2.6% from 2.8% and 2025 down to 2.2% from 2.3%. The Fed still sees inflation settling in at 2%. Only 3 participants saw upside risks to the inflation rate vs. only 12 in June.
  • Growth forecasts were also mostly unchanged. Longer term growth estimates remain at 1.8%.
  • Unemployment rate estimates were revised up by the following: 2024 from 4% to 4.4%; 2025 from 4.2% to 4.4%; 2026 from 4.1% to 4.3%. Longer run was unchanged at 4.2%. 12 participants saw upside risks to the unemployment rate vs. only 4 in June.

Key Takeaways from Chair’s Press Conference:

• Why a 50bp cut? The 50bp cut was a holistic decision based on inflation and employment including backward revisions to the previous year which suggested payrolls may be artificially high. It does not suggest they are behind, but we should take it “as a sign of their commitment not to get behind”.
• What should we expect going forward? The chair re-iterated they will take it meeting by meeting, but “there is nothing in the SEP that suggests the committee is in a rush.” They are projecting a “recalibration” of policy. It is important to note, though, that these projections are “assuming a particular forecast is realized.”
• How is the Fed thinking about the labor market? They continue to think the labor market is in solid shape, although risks are shifting to the downside and bears close watching. There is no “bright line” regarding a breakdown in the labor market, but they will look at a broad array of market data.
• For example, is 100k a month going forward okay? It will depend on labor supply and the hiring rate.

Our View:

• Today marked the start of the easing cycle. With the Fed cutting 50bps, they recognize the policy rate still remains well above estimates of neutral. With slowing inflation and rising unemployment, we expect additional front-loaded cuts, which will get the Fed closer to a neutral policy stance in 2025.
• We continue to view the risk to Treasury yields as asymmetric with sell-offs limited relative to the potential for rallies. While current market pricing for the path of the Fed Funds rate reflects ~200bps of easing through 2025, the market is still underpriced for a more negative economic scenario where the labor market slows further.
• We expect the 10-year Treasury yield to remain in a range of 3.375 – 3.875% as we move into the first quarter of 2025.

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Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.