The Federal Reserve (Fed) made its first cut to interest rates since March 2020 and has kicked off this cycle with a larger than usual cut of 0.50%.  The target range for policy is now 4.75% to 5.0%.  The move was telegraphed by Fed officials in the weeks leading up to today’s meeting and is likely just the first step in a process of rate normalization.  Market expectations for a cut at today’s meeting ramped up following a round of weaker than expected employment and manufacturing survey data in early August.        

Current Conditions – The economy has grown at a solid pace since the Fed’s last meeting.  The Fed sees the risks of higher inflation and weaker growth in better balance, but today’s action indicates growing concern over the level of unemployment.  The Fed’s preferred measure of inflation was down to 2.6% through July while the unemployment rate was up to 4.2% from a low of 3.4% in early 2023.

Forward Guidance – The Fed has gained confidence in inflation reaching a sustainable level of 2% and made small downward adjustments to near-term inflation projections.  The Fed also increased its projection for the unemployment rate to 4.4% from 4.0% by the end of 2024.  Data from the Fed’s Summary of Economic Projections show the median Fed voter projects a short-term rate of 4.4% by the end of this year and further easing to 3.4% by the end of 2025. 

Policy/Market Reaction – The change in the Fed’s target range was approved by an 11 – 1 vote with Governor Bowman dissenting in favor of a smaller rate cut.  Powell stressed that the Fed is not in a rush and will adjust policy based on incoming data and the economy’s reaction to the new rate structure.  The immediate reaction in both equity and bond markets was moderately positive.  Markets have already done some of the Fed’s work by preparing for rate cuts at upcoming meetings. Short-term interest rate markets are currently positioned for more aggressive easing with expectations for rates falling below 3% by the end of next year.

Gary Pzegeo, CFA  joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.