Points | FOMC - Cut and See
- Edward von der Schmidt
- Sep 18, 2024
- 9 min read
Updated: Mar 23, 2025
With greater confidence that inflation is moving sustainably lower and a willingness to preemptively support its employment goals, the Federal Reserve cut the fed funds target range by 50bp (0.50%, to 4.75-5.00%) in order to bolster labor markets and economic activity. This action to initiate an easing cycle represented a "re-calibration" of the central bank's restrictive policy stance. Facing an uncertain outlook and citing economic strength, the Fed declined to issue specific forward guidance as it sought to preserve policy flexibility in order to best respond to incoming data.
18 SEP 2024
Edward von der Schmidt
Key Takeaways
Contrary to our expectations for a 25bp initial reduction complemented by assertive forward guidance, the Fed cut 50bp on Wednesday instead, without committing to any specific easing cadence - thus maintaining policy flexibility in the near-term.
Satisfied with recent inflation progress, the central bank attended to cooling labor markets and moderating growth by sending a message that it would be prepared to respond in real time in order to safeguard economic strength.
While higher unemployment and marginally lower growth estimates pointed to shifting outlook risks that the Committee continued to characterize as "balanced" nonetheless, the Chair was careful not to undermine perceptions of economic resilience while repeatedly emphasizing confidence that inflation was on a sustainable downward trajectory.
Though the 'direction of travel' may be clear (i.e., rates will be adjusted lower), the exact path forward is not. Given that the Fed is "not in a hurry", the FOMC elected to preserve maneuverability as it looks to adjust policy "over time". The Fed is not on a preset course to cut rates at any given meeting.
Every meeting is now live - pauses and cuts of 25bp (or more) will be on the table in the months ahead. The vast majority of participants envisioned another 25-50bp of cuts by year-end 2024 in their SEP baselines with only two meetings to go. Absent any further information, 25bp per meeting appears to be a reasonable baseline at this juncture, but only for lack of other guidance. As Powell opined, "What happens will happen."
Still, expect FOMC decisions to be highly sensitive to incoming data. Two monthly employment reports to be released prior to the November 6-7 FOMC will influence the Fed's decision as to whether to cut again in quick succession and, if so, by how much.
Proximity to maximum employment and higher estimated neutral rates could temper the magnitude and pace of future rate adjustments, as would any material upside surprises to core inflation gauges. Nevertheless, employment considerations will be at the forefront.
Statement Comparison
Topic | July | September |
Economic Activity | "has continued to expand at a solid pace" | "" |
Job Gains | "moderated" | "slowed" |
Inflation | "has eased over the past year but remains somewhat elevated" | "has made further progress toward the Committee's 2 percent objective but remains somewhat elevated" |
Risks | "continue to move into better balance" | "are roughly in balance" |
Economic Outlook | "uncertain" | "" |
Additions:
"The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent."
"In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent."
"The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective."
Subtractions:
"The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."
"In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent."
Dissents:
Michelle W. Bowman - "preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting"
Summary of Economic Projections
The September SEP included YE 2027 projections for the first time.
The median estimate for 2024 real GDP growth ticked lower. Thereafter, median growth forecasts remained consistent near 2.0% annually; however, the distribution of participants' expectations shifted slightly lower.
Unemployment rate projections climbed 0.4pp in September to 4.4% in 2024. Estimates for 2025 and 2026 were marked 0.2pp higher. 2027 and longer-run unemployment rate forecasts were centered slightly above 4%.
PCE inflation estimates for 2024 and 2025 fell 0.3pp and 0.2pp, respectively; participants eyed a return to the 2% target by year-end 2026. Expectations for core gauges fell slightly less. The overall inflation outlook improved considerably from June.
Forecast Uncertainty | GDP | Unemployment | PCE | Core PCE |
Lower | -- | -- | -- | -- |
Broadly similar | 11 (+2) | 8 (-1) | 11 (+8) | 11 (+8) |
Higher | 8 (-2) | 11 (+1) | 8 (-8) | 8 (-8) |
Forecast Risks | GDP | Unemployment | PCE | Core PCE |
Weighted to downside | 7 (+4) | -- | -- (-1) | -- (-1) |
Broadly balanced | 11 (-5) | 7 (-8) | 16 (+10) | 16 (+10) |
Weighted to upside | 1 (+1) | 12 (+8) | 3 (-9) | 3 (-9) |
The median projected midpoint of the federal funds rate target range was marked 75bp lower for YE 2024 and 2025 (to 4.375% and 3.375%, respectively).
These projections imply 50bp of cuts over the next two meetings and 150bp over the next ten (or 25bp per quarter in 2025).
Nine participants have projected another 50bp of cuts from the current range between the November and December meetings; seven have projected 25bp.
The longer-run target range remained within a 2.5-3.5% band (median: 2.75-3.00%), suggesting scope for 200bp of further easing from today before reaching representative interpretations of "neutral". In practice, the neutral rate is only inferred "by its works".
Q: What does "longer-run" mean in the SEP?
A: "Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy."
Prepared Remarks
"This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent."
"Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than just before the pandemic in 2019."
"Our restrictive monetary policy has helped restore the balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remain well anchored."
"As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased."
"This recalibration of our policy stance will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we begin the process of moving toward a more neutral stance."
"We are not on any preset course. We will continue to make our decisions meeting by meeting."
"If the economy remains solid and inflation persists, we can dial back policy restraint more slowly. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond."
Press Conference
"There is nothing in the SEP that suggests the committee is in a rush. This process evolves over time. Of course, that's a projection...We can pause if that's appropriate." (re: the near-term path of policy rates)
"I think we left it open going into blackout ... there was a lot of discussion back and forth ... an excellent discussion today. There was also broad support for the decision that the committee voted on." (re: 25 v. 50)
"Look at the SEP. All 19 of the participants wrote down multiple cuts this year. All 19."
"We're going to take it meeting to meeting. There's no sense the Committee feels it's in a rush to do this. We made a good strong start to this and that's really frankly a sign of our confidence."
"The labor market is in solid condition. And our intention with our policy move today is to keep it there."
"We don't think we're behind. We think this is timely, but I think you can take this as a sign of our commitment not to get behind. So it's a strong move."
"I do not think that anyone should look ... and say 'this is the new pace'. You have to think about it in terms of the base case ... look at the SEP. You see cuts moving along. The sense of this is we're recalibrating policy down over time to a more neutral level and we're moving at the pace that we think is appropriate given developments in the economy and the base case. The economy can develop in a way that will cause us to go faster or slower."
"The level of [labor market] conditions is pretty close to what I would call maximum employment. You're close to mandate on that ... [but] the labor market bears close watching and we'll be giving it that."
"There is thinking that the time to support the labor market is when it is strong and not when we begin to see layoffs."
"If the labor market were to slow unexpectedly, then we have the ability to react to that by cutting faster."
"We have greater confidence now that inflation is moving down to 2%, but at the same time, our plan is that we will be at 2% over time."
"What have we been trying to achieve? ... restor[ing] price stability without the kind of painful increase in unemployment that has come sometimes with this inflation."
"More data. The usual. Don't look for anything else." (re: what the Fed expects to learn between now and November)
"To me ... the neutral rate is probably significantly higher than it was back then." (re: the ZIRP and negative yields era)
"No. We're not." (re: the Fed declaring a decisive victory over inflation)
"As I said, you can see our 50 basis point move as a commitment to make sure that we don't ... fall behind."
"We think that it is time to begin the process of recalibrating [the fed funds target range] to a level that's more neutral rather than restrictive. We expect that process to take time as you can see in the projections we release today."
"The sense of the change is that we're recalibrating our policy to a stance that will be more neutral. Today we made a good, strong start on that. I think it was the right decision and I think it should send the signal that we're committed to coming up with a good outcome here."
Note: Any quotation errors are our own.
Implied Pricing
Implied rate expectations derived from futures markets imply at least a 25bp cut in November (no chance of a pause) and indicate a 90% chance of the Fed cutting 100bp over the course of its next three meetings.
Although the majority of FOMC participants expect the target range to fall between 3.00% and 3.50% by the end of 2025, futures imply an expectation that this range will be reached by June.
Notes
Powell cited incoming employment data and inflation reports (including during the Fed's media blackout) as the basis for Wednesday's decision to cut 50bp as opposed to 25bp. In particular, he drew attention to QCEW (Quarterly Census of Employment and Wages) reports suggesting that payroll figures may have been artificially high. He also referenced the Beige Book, which had shown flat or declining economic activity in 9 of 12 districts (up from 5).
FOMC officials may voice disparate opinions, but Powell drives consensus time and again after allowing an opportunity for different views to be heard and discussed.
Abundant reserve levels have given the Fed confidence that its balance sheet runoff can continue in conjunction with policy rate easing.
Powell made it clear that the Fed still views labor markets as "solid", citing historically low unemployment, high participation rates, even vacancies to unemployment ratios, and a normalization in voluntary attrition (quits).
Powell commented that we appeared to be near the point were further reductions in job openings "will translate more directly into unemployment", implying that the slack the Fed had enjoyed while maintaining restrictive policy has diminished.
The Chair repeatedly came back to the idea of the Fed choosing to take preemptive action not in anticipation of weakness but to keep the economy in a strong position.
Chair Powell acknowledged that housing inflation is one area that has lagged and whose normalization has been slower than expected.
Powell suggested that, had subsequent inflation data been available at the July 31 FOMC, the Fed may very well have cut 25bp in July. This came in response to a question about effectively catching up after the pause in July.
A lot can happen to change the Fed's thinking during the pre-FOMC media blackout period.
For someone who once loathed answering questions about the "dot plot" and who actively discouraged reading into the SEP, Powell sure did lean on those baselines in lieu of providing more explicit forward guidance.
Sources
FOMC Statement, Summary of Economic Projections, and Press Conference
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
Chicago Mercantile Exchange FedWatch
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
This is not financial advice and should not be taken as such. The observations and opinions expressed here are protected by copyright and belong to Datum Research LLC. All rights reserved.