The US Federal Reserve today launched the widely-anticipated easing cycle with a full 50 basis point rate cut, dropping the fed funds target range to 4.75-5.0 percent. Market expectations had gravitated toward a move of this size in recent trading sessions. Interestingly, and unusually in recent times, one FOMC member, Michelle Bowman, voted in favour of a 25 basis point cut.
The media release is surprisingly anodyne, considering how much weight markets had been placing on today's decision. The key passage is this one: 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 economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
Alongside the media release, the Fed has released updated economic projections. The widely-followed "dot plot" shows that a small plurality of FOMC members expect the funds target to fall by a further 50 basis points by year end. (Reminder: there are two more FOMC meetings scheduled for the remainder of 2024). Further easing is expected through 2025, with the funds target expected to end that year at about 3.25 percent.
The risk for the Fed in starting the easing cycle with an outsized cut is that investors might assume the economic situation is much worse than previously thought, leading to a selloff in equity markets. Evidently the messaging from the Fed ahead of the announcement has worked, because the initial reaction on Wall Street has been a modest move higher. Markets will now focus on Chair Jerome Powell's press conference for clues about whether there are more large rate cuts on the horizon: fearless prediction, Powell will say it all depends on the data.
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