Key takeaways
- The FOMC has slashed the Fed funds target by 50 basis points (bp) to 4.75–5.0%, signaling the beginning of a new monetary easing cycle.
- J.P. Morgan Research expects the Fed to cut rates by another 50 bp at its next meeting in early November.
- Looking further ahead, the Fed’s “dot plot” projects four more 25 bp cuts (totaling 100 bp) in 2025.
The Federal Open Market Committee (FOMC) opted to go big with its first interest rate cut in four years, slashing the Fed funds target by 50 basis points (bp) to 4.75–5.0%. This dovish move signals the end of the “higher-for-longer” era of interest rates — and the beginning of a new monetary easing cycle that could last beyond 2025.
The half-point cut is “an appropriate recalibration” given the current disinflationary backdrop, according to Michael Feroli, chief U.S. economist at J.P. Morgan. Core inflation was recently revised downward by 0.2 percentage points this year to 2.6%, and continues to taper to 2.0% by 2026.
“While the rest of the Street was looking for a more modest 25 bp cut, since early August we had been calling for a 50 bp cut, reasoning, in part, that with hindsight the Fed should have cut in late July. This larger move helps get it back onside,” Feroli said.
“Our expectation for a 50 bp cut at the next meeting is contingent on further softening in the two jobs reports between now and then.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
How big could the next Fed rate cut be?
J.P. Morgan Research expects the Fed to cut rates by another 50 bp at its next meeting in early November. This diverges from the Fed’s “dot plot” — a chart that records each Fed official’s projection for short-term interest rates — which points to two additional 25 bp cuts this year.
Future decisions will of course depend on the data. “In terms of our outlook, we are still expecting a faster pace of rate normalization than the median dot,” Feroli said. “Our expectation for a 50 bp cut at the next meeting is contingent on further softening in the two jobs reports between now and then. More benign labor data would, instead, seal the case for the FOMC’s Goldilocks scenario of 25 bp eases per meeting over the remainder of the year.”
Looking further ahead, the Fed’s “dot plot” forecasts four more 25 bp cuts (totaling 100 bp) in 2025. The Fed has also increased projections for its neutral funds rate by another eighth of a percentage point to 2.875% — a figure it expects to reach in 2026.
FOMC federal funds rate forecasts
The FOMC’s estimate of the long-run or neutral funds rate has continued to creep higher, and currently stands at 2.875%.
What does the Fed cutting cycle tell us about the economy?
While rate cuts often point to slowing growth, the Fed is generally upbeat about the wider economy, especially in light of a strong — albeit gradually cooling — labor market. Nonfarm payrolls increased by 142,000 in August, while the unemployment rate ticked down from 4.3% to 4.2%.
“In other contexts, a larger move may convey greater concern about growth, but Fed Chair Jerome Powell repeatedly stressed this was basically a joyous cut as ebbing inflation allows the Fed to act to preserve a strong labor market,” Feroli said. “Moreover, if policy is set optimally, it should return the economy to a favorable place over time.”
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