In a highly anticipated decision, the Federal Open Market Committee (FOMC) voted to lower the federal funds rate by 50 basis points to a target range of 4.75%-5.00%, a larger-than-expected move and their first move lower since March 2020. In his press conference, Federal Reserve (Fed) chairman Jerome Powell repeatedly described the move as a policy “recalibration”, suggesting that the Fed does not believe they are behind the curve and instead view this decision as proactively ensuring against such an outcome.

• Changes to the statement language were largely expected: job gains have “slowed” (vs. “moderated”), the Fed has gained “greater confidence that inflation is moving sustainably towards 2%”, and the risks to achieving both sides of its mandate are “roughly in balance”. Language on the economic backdrop did not change meaningfully, unemployment remains low, inflation remains somewhat elevated and the Fed is attentive to risks on both sides of the mandate. In a highly rare fashion, the statement included 1 dissent from Michelle Bowman, who preferred to lower rates by 25bps. This marked the first dissent by a governor since 2005.

• The dot plot also showed that the totality of rate cuts expected to be delivered by Fed officials over the next 2 years is still roughly unchanged, although it has been pulled forward. The median FOMC projection now shows another 50bps worth of cuts over the remaining two meetings of the year, followed by 100bps in 2025 and 50bps in 2026. This would suggest the federal funds rate reaches the Fed’s “neutral” level by the end of 2026, and that neutral rate has also been nudged up to 2.9% from 2.8%. Compared to June, the last time the Fed released a dot plot, the median projection for rate cuts increased by 75bp this year.

• The updated economic projections also leaned dovish. Inflation projections were revised lower modestly, while the unemployment rate projection for this year and next year nudged higher to 4.4%, raised by 0.4% and 0.2% pts respectively. Growth projections were largely unchanged, with a modest tick lower to 2% from 2.1% for this year.

• In the press conference, Powell struck a cautiously upbeat tone on the economy, acknowledging the slowdown in labor market conditions but pointing to the broader set of indicators that still shows the labor market is on stable footing. Interestingly, Powell also admitted that the committee may well have cut rates in July if they had the July Jobs Report in hand.

In sum, the Fed delivered the message that policy normalization has begun, more cuts are coming and despite a slightly larger cut to begin with, easing will still be gradual (barring a more material slowdown in the economy). Chair Powell reiterated confidence in economic conditions but with continued attention to any further slowdown in labor market conditions. As we have communicated, we think it is a slippery slope to ease policy quickly at the risk of stoking recession fears. With a 50bp cut, Powell needed to convince markets that they are not worried about recession, and so far, they may have succeeded.

Markets saw mixed and choppy price action following the Fed decision. Equities finished mostly lower with defensives lagging, cyclicals outperforming and tech mixed. Short-term yields fell while the curve steepened and markets moved to price in roughly 70bps of cuts in the remainder of the year.

More broadly, this outcome of Fed rate cuts in the context of a soft landing should bode well for both stock and bond markets. However, investors should still focus on enhancing quality and diversification in portfolios as economic uncertainties loom and market concentration risks remain.

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