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Markets Are Expecting More Future Cuts Than Fed Officials

Wall Street took Wednesday’s policy pivot as a sign of more aggressive cuts to come.

Traders now see a more than 50% chance that the Fed will lower its federal funds rate target range by another 75 basis points to between 4% and 4.25% by the end of the year. With only two Fed meetings left—one in November and one in December—that implies another 50-point cut at one of those meetings.

According to their quarterly economic projections, Fed officials don’t expect this year’s rate reductions to be quite so dramatic.

Nine of the 19 Federal Open Market Committee (FOMC) members who submitted forecasts estimated the policy rate would end the year between 4.25% and 4.5%. Only one member expects the next two cuts to match the market’s expectations. Two members don't expect to cut rates at all later this year.

Read more about market expectations here.

-Colin Laidley

No Political Motivations Went Into This Decision, Powell Said

The Federal Reserve potentially risked political fallout today by making a rate cut just ahead of the election.

Much has been said about the Federal Reserve's moves impacting the election, even by former president Donald Trump himself. In late July, Trump said if the central bankers cut their fed funds rate before the election, they would be doing “something that they know they shouldn’t be doing."

In response to a reporter's question about potential political motivations, Powell said that wasn't a factor in their decision.

"This is my fourth presidential election at the Fed," Powell said. "And, you know, it's always the same. We're always, we're always going into this meeting in particular and asking, 'what's the right thing to do for the people we serve?' ...It's never about anything else. Nothing else is discussed."

"I would also point out that the things that we do really affect economic conditions for the most part with a lag," he said.

Jobs Market Is Still Healthy, Powell Said

Despite growth in the past few months, Fed Chair Jerome Powell said the labor market is still strong.

"The labor market is actually in solid condition, and our intention with our policy move today is to keep it there," he said in response to a question by a reporter. "You can say that about the whole economy—the U.S. economy is in good shape."

The last labor market reading showed that a typically reliable recession indicator was still flashing.

Jerome Powell Focuses on Dual Mandate in Press Conference

In his prepared statements during a press conference following the Fed's decision announcement, Chair Jerome Powell focused on the balance of the central bank's dual mandate.

"We know that reducing policy restraint too quickly could hinder progress on inflation," he said. "At the same time, reducing restraint too slowly could unduly weaken economic activity and employment. And considering additional adjustments at the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks."

Markets Jump on 50 Basis Point Decision

The SandP 500 jumped to a record high on Wednesday after the Federal Reserve lowered its benchmark interest rate by 50 basis points, an above-average cut to start its first rate-cutting cycle in four years.

The tech-heavy Nasdaq Composite and Dow Jones Industrial Average also jumped nearly 0.9% and 0.6%, respectively.

Treasury yields swung wildly in the minutes after the rate decision but were mostly higher. The rate-sensitive 2-year note was the exception; its yield dropped about 6 basis points on Wednesday’s rate decision.

Read more about the implications for the stock market here.

-Colin Laidley

Federal Reserve Policy Makers See More Cuts By the End of the Year

Fed officials expect to make further cuts in the coming months, reducing the rate by an additional 50 basis points over their next two meetings, according to a survey of the committee's members released Wednesday alongside the policy announcement.

-Diccon Hyatt

Much of the Statement Was Changed From the Last Meeting

Major changes were made to the decision statement released by the Federal Open Markets Committee.

The statement is painstakingly revised every meeting, crafted to strike the right tone for Fed watchers. During periods when the Fed is holding its interest rate steady, the result is a statement nearly identical to the previous one, perhaps with just a word or two changed.

Since today's move was so different from the previous 14 months, the statement was materially different.

There Was Some Dissent Among Voters

Not every policymaker was on board with the decision. Governor Michelle Bowman voted against the other 11 members of the committee, preferring a smaller cut of 25 basis points, breaking the FOMC's stretch of unanimous voting for the first time since June 2022.

Economist and former member of the White House Council of Economic Advisers Betsey Stevenson wrote on social media platform X that the dissent doesn't necessarily indicate uncertainty.

-Diccon Hyatt

Federal Reserve Cuts Interest Rates For First Time Since March 2020

The Federal Reserve cut its influential fed funds rate 50 basis points Wednesday to a range of 4.75% to 5%. The first rate cut since March 2020 marked a shift in strategy from the Fed, which had held its key interest rate at a 23-year high for 14 months before Wednesday.

With inflation approaching the Fed's goal of a 2% annual rate, policymakers on the Federal Open Market Committee are shifting their strategy away from inflation-fighting mode to preserve the job market.

Read more about the Fed’s decision here.

-Diccon Hyatt

Does the ‘Dot Plot’ Matter?

In addition to the most eagerly anticipated FOMC decision this year, the Fed will release its economic projections.

The Fed releases economic projections at four out of their eight meetings each year. In the economic projections, the 19 Federal Open Market Committee members predict what they think the fed funds rate will be at the end of the next few years. Each person’s answer is charted on a graph called the “dot plot.”

The dot plot was introduced to the economic projections report in 2012 to be more transparent about how policymakers are thinking about their next steps. However, the dot plot is just an estimate, and projections can shift with the state of the economy.

The dot plot has received criticism this year, as critics say the anonymized data paint a confusing picture of the path ahead.

Central bankers themselves also have taken issue with how the graph is interpreted by forecasters and market watchers.

Will There Be Dissenting Votes at This Meeting?

Just as traders, analysts, and economists can’t agree on what is likely to happen at today’s Federal Reserve Open Markets Committee meeting, central bankers may also disagree about the appropriate action to take.

The FOMC has 12 voting members, including the seven governors and five of the 12 regional bank presidents, who vote on a rotating basis. The vote does not have to be unanimous to make a rate cut today. However, FOMC decisions are often unanimous, even when there is disagreement over the course of action.

For example, minutes from the Fed’s July meeting showed that several members were interested in potentially cutting interest rates at that time. Still, none dissented during the vote to keep current rates intact.

The last time a member cast a dissenting vote was in 2022 when then-Kansas City Fed President Esther George pushed to hike less than the prevailing 75 basis points.

Federal Reserve Chair Jerome Powell will likely seek consensus among all voters today to boost market participants' confidence in the Fed's ability to prevent a recession, economists said.

Read more about why Powell will likely pursue a unanimous vote here.

It’s Weird Not to Know What Will Happen This Close to A Fed Meeting

The Federal Reserve may be doing one thing the central bank tries to avoid–being unpredictable.

Central bankers typically telegraph the Fed’s next move far in advance. Central banks worldwide generally try to avoid last-minute surprises to financial markets, believing monetary policy is more effective when it’s predictable.

However, recent economic data has been mixed in the lead-up to the meeting, and central bankers haven’t been explicit about how much they are willing to cut. That has led to rate cut expectations swinging up and down several times in the days leading up to the meeting.

In an analysis Monday morning, Deutsche Bank analysts said this meeting could be the biggest rate cut “surprise” in more than 15 years.

The odds of either a 25 or 50 basis point cut are close, according to the CME Group’s FedWatch tool, which forecasts interest rate movements based on fed funds futures trading data. That will result in some traders and forecasters having their expectations upended.

Read more about how and why the Federal Reserve telegraphs its moves here.

The Argument For 50 Basis Points

Those who think the Federal Reserve should cut rates more aggressively worry that a smaller cut would negatively affect the economy and financial markets.

Supporters of a more aggressive hike think the Federal Reserve could drag their feet for too long with a conservative approach and push the economy into a recession. As the labor market starts to show signs of strain under the pressure of monetary policy, these concerns are more pronounced.

Additionally, traders are pricing in a higher chance of a 50 basis points cut and any other decision could roil the markets.

However, with the chances becoming more even as we move closer to the meeting, that could be true for either path ahead, wrote Deutsche Bank’s Jim Reid Wednesday morning.

“Given the uncertainty that’s still looming, we can expect a decent market reaction whatever the decision is tonight,” Reid wrote. “A lot of money will be made and lost today.”

The Argument For 25 Basis Points

For those in support of a 25 basis point cut, there are some good reasons to keep the decrease small.

The Federal Reserve’s monetary policy works in part because of the confidence the public has in the central bank. Some forecasters argue that a more conservative cut would signal that the Fed has the situation under control and isn’t panicked about the state of the economy.

Supporters also argue there is room for more aggressive rate cuts later in the cycle, and could mirror the Federal Reserve’s path in hiking rates, BMO economists wrote Wednesday morning.

Will the Fed Be More Conservative or More Aggressive With Their Cuts?

The fed funds rate stands at 5.25%-5.5% ahead of today’s decision. Economists and financial market participants can’t agree on whether the Fed will make a 25 basis-point cut or a more aggressive half-point cut.

Markets are now pricing in a 55% chance of the larger cut, according to the CME Group’s FedWatch tool, which forecasts interest rate movements based on fed funds futures trading data. That was up from about 14% a week ago and down from 64% yesterday.

Economists also can’t agree on the path ahead. Yesterday’s retail sales report was the last large piece of economic data released before the Fed’s decision. After that report, economists had mixed reactions to whether it indicated a more conservative or aggressive cut.

What to Expect From Today’s Federal Reserve Meeting

The Federal Reserve’s Open Markets Committee (FOMC) is expected to reverse course today after holding the federal funds rate at 23-year highs for the past 14 months.

Economists and market participants expect central bankers to cut their influential interest rate for the first time since 2020 today. A rate cut would mark the end of the Fed’s campaign of restrictive monetary policy designed to push up borrowing costs and, in turn, subdue inflation that ramped up in 2021.

Fed officials have indicated over the last few weeks that they are inclined to cut rates but haven’t signaled by how much. Economists, analysts and other traders are split on whether the cut will be 25 or 50 basis points.

In addition to the fed funds rate decision, central bankers will also make predictions about their next steps in the “dot plot” and other economic projections.

Read more about what to expect from today’s decision here.