Authors & Contributors
How much and how soon can we expect rate cuts after the upcoming September FOMC meeting?
The Fed’s Rate Path
Source: The Federal Reserve Bank of St. Louis FRED database, Bloomberg, and The Federal Reserve Board of Governors accessed on 9/13/2024
As central bankers departed the Jackson Hole Symposium at the end of August, Chair Powell made the message clear: “the time has come for policy to adjust.” With better news on inflation and a cooling labor market, the Federal Reserve (Fed) has enough confidence it will begin easing at its September 17 to 18 Federal Open Market Committee (FOMC) meeting. The question is no longer when will the Fed start to cut, but by how much and how fast.
Today’s chart shows the market’s expected path for the Fed’s policy rate implied by fed funds futures pricing. Pricing is now consistent with probability of a coin toss of either a 25 or 50 basis point cut by the FOMC at its meeting on September 17 to 18. Once the Fed’s ball starts rolling downhill, the funds rate is perceived to be at least 118 basis points lower by year-end. This seems to rest on concern that economic activity will slow considerably without monetary policy support and confidence that inflation will return to the Fed’s goal.
We think this expected rate descent is too steep. The labor market has indeed cooled, but from overheated levels. Recent data shows other sectors of the US economy, like the consumer, remain solid. Market pricing implies the Fed will deliver a jumbo cut of 50 basis points at one of the FOMC meetings between now and year-end. An outsized cut in the early innings of the easing cycle may present communication challenges as like-sized moves could be extrapolated further out. In framing its September action, the Summary of Economic Projections accompanying the September FOMC decision will be a key signaling tool. Any changes to the Fed’s ‘dot plot’ will be given close attention, which implied a gradual pace of cuts as shown on the chart in its last update in June.
An uncertain world argues in favor of a more measured approach to easing. The upcoming US presidential election on November 5 represents a large unknown with the outcome set to be a major force shaping the political economy over the next four years. Both candidates appear to favor increased trade protectionism, which would manifest itself as an adverse supply shock and inflationary risk over the medium-term.
We believe US economic activity will slow somewhat, but to a pace closer to potential. The headlines about consumer prices have been favorable for the past five months, but an assured return to the zone of price stability will take more time and may be uneven. Risks remain for inflation to increase as the Fed presses on the easing lever. We expect the Fed to start easing with a 25-basis-point cut at its September FOMC meeting and to proceed cautiously with like-sized quarter-point moves at each meeting through mid-2025, which is a more gradual path than markets currently anticipate.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
All investments involve risk, including the possible loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorized. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be, interpreted as recommendations. Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY product. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
Indices referred to herein are used for comparative and informational purposes only and have been selected because they are generally considered to be representative of certain markets. Comparisons to indices as benchmarks have limitations because indices have volatility and other material characteristics that may differ from the portfolio, investment or hedge to which they are compared. The providers of the indices referred to herein are not affiliated with Mellon Investments Corporation (MIC), do not endorse, sponsor, sell or promote the investment strategies or products mentioned herein and they make no representation regarding the advisability of investing in the products and strategies described herein. Investors cannot invest directly in an index.