A surprise 50bps rate cut by Fed - Fintellectual Street

The Fed surprised the market with a 50bps rate cut in September 2024, reducing the fed funds target range to 4.75% -5% . This is the first rate cut since March 2020. Although, the decision of rate cut was anticipated, but there was speculation about size of cut. Economists didn’t expect the move but markets were pricing in a 55% chance of a larger cut. Many economists were expecting only a 25bps rate cut in September.

FOMC September statement highlighted that –

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.“

“The Committee will continue to monitor the implications of incoming information for the economic outlook.”

***Source: Fed,*** *Comparison of FOMC July vs. September statement*

***Source: Fed,*** *Economic projections of Federal Reserve Board members, FOMC September 2024*

Fed’s new economic projections showed that GDP growth was slightly down at 2% this year vs. 2.1% projected in June, while GDP forecasts for 2025 and 2026 remain unchanged. Unemployment rate moved higher to 4.4% in 2024 compared to 4.0% projected earlier. PCE inflation forecasts was lowered to 2.3% in 2024, reducing from 2.6% forecasted in June.

***Source: Fed,*** Dot Plots ( Midpoint of target range
or target level for the federal funds rate), FOMC September 2024

The latest ‘Dot plot’ (which the US central bank uses to signal its outlook for the path of interest rates) showed 2 more 25bps rate cuts this year (100bps in total rate cuts for 2024).

Markets Impact

The immediate reaction of market was a ‘risk on’. US stocks surged after the Fed delivered a 50bps rate cut. US dollar index fell to 14-month low and gold prices jumped to record high. UST 10yr yield slipped to 3..64% after FOMC decision but bounced back quickly.