Key takeaways
- The Federal Reserve lowered interest rates by 50 basis points, easing monetary policy for the first time in four years due to progress on the Fed’s dual mandate.
- The Fed’s decision to ease monetary policy is likely to support growth and stabilize a slowing labor market. Our strategists believe this could extend the current economic cycle.
- Fed Chairman Jerome Powell emphasized that inflation is “much closer” to its 2% target and the labor market is “less tight” than pre-pandemic in 2019.
- Our strategists believe that there will likely be two additional rate cuts in 2024, and expect the cuts to continue into 2025.
- Bond yields are likely to fall lower from here, but remain elevated today. Our strategists see this as an opportunity to lock in attractive rates and consider a move out of excess cash positions.
Contributors
Cristina Dwyer
Analyst, J.P. Morgan Wealth Management
Federal Open Market Committee Announcement
At the September 2024 Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) lowered interest rates by 50 basis points, easing monetary policy for the first time in four years due to progress on the Fed’s dual mandate. This lowers the interest rate target to a range of 4.75% to 5%.1
The Fed’s decision to ease monetary policy is likely to support growth and stabilize a slowing labor market. Our strategists believe this is the beginning of the Fed moving into a new stance – in the Fed’s eyes, recent slowing in the labor market is now a bigger risk than inflation. This cut in policy rates, and plans to lower rates further, is designed to support economic growth.
Noteworthy changes in the Fed’s statement
In the FOMC statement, the Fed reiterated that the economy “continued to expand at a solid pace” and that it remains committed to “achieve maximum employment and inflation at the rate of two percent over the longer run.”2
However, the statement included noteworthy changes from the prior statement regarding inflation and the labor market. The Committee noted that it has “gained greater confidence that inflation is moving sustainably towards two percent” and the risks to its dual mandate “are roughly in” balance, compared to being in “better” balance as noted in the prior statement. This follows August’s inflation data which showed inflation is now at 2.5%, considerably closer to the Fed’s 2% target.3
The statement describes job gains as having “slowed,” a change from “moderated” in the past statement, and underscores it is now “strongly committed to supporting maximum employment.”4 This follows August’s labor market data, which revealed that the labor market is slowing more quickly than expected, but not breaking.
Shifts in the Summary of Economic Projections
The much-anticipated Summary of Economic Projections (SEP) showed that the median FOMC participant is penciling in 50 basis points of further cuts across the remaining two meetings this year, followed by 100 basis points of cuts in 2025 and 50 basis points more in 2026 to a terminal rate of 2.9%, where they sees rates remaining through 2027.5
Officials raised their end of 2024 median forecast for the unemployment rate to 4.4% from 4%, a slight decline from the current rate of 4.2%.6
These projections reflect the Committee’s belief that the risks to inflation have become broadly balanced while risks to the unemployment rate are now weighed to the upside. This will likely lead to further rate cuts for risk management purposes, to help prolong the expansion.7
Economic and monetary policy outlook
Economic variables are trending in the right direction, which allowed for the Fed to begin easing monetary policy. Chair Jerome Powell emphasized that inflation is “much closer” to its 2% target and the labor market is “less tight” than pre-pandemic in 2019. He highlighted that the “primary focus” has shifted from “bringing down inflation” to supporting maximum employment.8
Going forward, Chair Powell underscored that the Fed’s decision on the direction of rates continues to be made on a “meeting by meeting” basis with data leading the way. This measured approach allows the committee to carefully assess the evolving outlook and the balance of risks.9
Our strategists believe that there will likely be two additional rate cuts in 2024, and expect the cuts to continue into 2025. This cut in policy rates should help support labor markets from slowing too quickly.
Market reaction
U.S. equities were initially higher in the afternoon following the Fed’s announcement on September 18, as stocks made an intra-day all-time high, while bond yields – especially at the short end – moved lower. However, by the end of the day, the S&P 500 declined by 0.29%, the Dow Jones Industrial Average declined by 0.25% and the Nasdaq declined by 0.31%. In early trading on Thursday, the market was up big, with S&P 500 futures in the green by 1.5%.
What a rate cut could mean for investors
Even though bond yields have fallen, our strategists still think excess cash should find a better home while the Fed is cutting rates. This decision to cut 50 basis points reinforces that reinvestment risk is real, and bond yields could still move lower from here. But it’s not too late – over the last 12 cutting cycles (from first cut to last cut), fixed income has outperformed cash in all but one. When the Fed cuts rates outside of recession, equities tend to deliver strong performance.
References
Board of Governors of the Federal Reserve System, “Federal Reserve Issues FOMC Statement.” (September 18, 2024)
Ibid.
Ibid.
Ibid.
Board of Governors of the Federal Reserve System, “Summary of Economic Projections” (September 18, 2024).
Ibid.
Ibid.
Board of Governors of the Federal Reserve System, “Transcript of Chair Powell’s Press Conference Opening Statement” (September 2024).
Ibid.
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