At 2:00 am Beijing time on Thursday, September 19th, the Federal Reserve announced that it would lower its target range for the federal funds rate to 4.75% -5.00%, marking the first time since March 16, 2020, with a massive 50 basis point cut. The long-awaited policy shift has finally arrived.
After the Federal Reserve announced the above-mentioned interest rate cut decision, the three major stock indexes in the United States initially rose, but then quickly gave up their gains and turned into a decline. As of the close, the Dow Jones Industrial Average fell 103 points, or 0.25%, while the Nasdaq Composite Index and the S&P 500 Index both fell about 0.3%. The yield of US treasury bond bonds narrowed the rising momentum earlier in the day.
So, what key signals did the Federal Reserve release on this globally anticipated night of interest rate cuts? Apart from the decision to cut interest rates by 50 basis points, what other key details cannot be ignored? Here we have summarized 9 key points of the interest conference for readers to sort out:
① Reduce interest rates by 50 basis points
Prior to the Federal Reserve's September interest rate meeting, market participants' expectations had been fluctuating between whether the Fed would cut interest rates by 25 basis points or 50 basis points. In the end, the Federal Reserve voted on Wednesday to cut interest rates by 50 basis points in one go, choosing a bolder start to the first rate cut since 2020. This highly anticipated transformation was made after the central bank launched a full-scale fight against inflation two years ago.
Prior to this, the Federal Reserve had held its policy rate at a high level since 2001 for eight consecutive meetings (since July last year) without taking action. The Fed's interest rate cut this time is actually roughly in line with the pricing of the interest rate market before the meeting, but there is no doubt that it has hit the "face" predicted by many investment bank analysts. In yesterday's forecast, we actually introduced that out of 114 institutional economists surveyed by Bloomberg, only 9 "successfully" predicted that the Federal Reserve would cut interest rates by 50 basis points tonight, while the vast majority (105) of surveyed economists believed that the Fed would only cut interest rates by 25 basis points
The Federal Reserve wrote in its monetary policy statement that, given the progress of inflation and the balance of risks, the committee has decided to lower the target range for the federal funds rate by 50 basis points to 4.75% to 5%. When considering any further adjustments to the target range of the federal funds rate, the committee will carefully evaluate future data, changing prospects, and risk balance.
Federal Reserve Chairman Powell also stated at a press conference after the meeting that the Fed's current goal is to keep inflation cool while ensuring that unemployment does not rise. Investors should see a significant 50 basis point rate cut as a sign of the Fed's "firm commitment" to achieving these goals.
Regarding this, Chris Larkin, a strategist at E * Trade, a platform under Morgan Stanley, stated that the market has achieved the desired outcome - the Federal Reserve significantly reduced interest rates on its first move. The Federal Reserve has always been known for being neither hasty nor impetuous, so if people think that the Fed's actions are too slow, especially when economic data continues to be weak, it may disappoint. But today they have done it
For Krishna Guha, head of Evercore ISI's global policy and central bank strategy team, the Fed's move provides some assurance for an economic soft landing and should be particularly beneficial for risk assets that adapt to the cycle, such as small cap stocks, cyclical stocks, commodities, and commodity currencies.
② Negative votes appear
Although the Federal Reserve made the decision to cut interest rates by 50 basis points on Wednesday, it is evident that there are significant internal divisions regarding this matter. The Federal Reserve statement shows that Bauman became the first director level official to vote against the Fed's interest rate decision since 2005- she advocated for a small rate cut to start the easing cycle at Wednesday's policy meeting.
As the current hawkish figure within the Federal Reserve, Bauman believes that this time a more standard 25 basis point rate cut should be implemented. In fact, she has long been cautious about slowing inflation and stated in her speech on August 20th that price increases are still higher than the Federal Reserve's 2% target. She pointed out at the time that the federal funds rate should be gradually lowered.
The decisions of the Federal Reserve have rarely encountered dissent in recent years, and this internal "peaceful" situation has been present throughout Powell's tenure as chairman. The last time there was a disagreement on the outcome of the Federal Reserve's decision was from a regional Fed chairman (rather than a council member closer to the center of power) - George, then the Kansas City Fed chairman, voted against it at the June 2022 meeting, advocating for a slight rate hike.
It is worth mentioning that we mentioned in yesterday's outlook that even within the Federal Reserve, there may be some controversy over whether to cut interest rates by 25 basis points or 50 basis points. An interesting aspect is that until the latter part of last week, investors had expected the Fed's interest rate cut to be only 25 basis points, as few officials publicly called for a larger rate cut. But within the current Federal Reserve, Chairman Powell may be a "dove" who hopes to implement loose policies with greater force. The recent media coverage of the Federal Reserve and the shift in market expectations may not necessarily be the result of intense internal competition within the Fed.
Of course, Powell emphasized at the press conference after the meeting that although there was a vote against today's decision to significantly cut interest rates, it also "received widespread support from Fed officials after repeated discussions. There are various viewpoints, and in fact, there is also a lot of consensus
KPMG Chief Economist Swank said in an interview on Thursday that Powell is willing to significantly cut interest rates despite opposition from his board members, indicating "how much he wants to cut interest rates by half a percentage point". Swank pointed out that getting other members of the committee to agree to a rate cut would be a "huge victory" for Powell.
③ The Secret of Dot Matrix: 50& one hundred
In terms of the highly anticipated interest rate forecast "dot matrix" of the Federal Reserve's end of season decision, there are two key figures worth investors taking note of at present: the Federal Reserve expects to cut interest rates by 50 basis points this year and 100 basis points next year.
The latest pie chart for September shows that the median expectation of the Federal Reserve's interest rate by the end of 2024 among 19 policy makers falls between 4.25% and 4.5%. This means that they overall believe that by the end of the year, they will accumulate another 50 basis points of interest rate cuts on the current basis.
The median forecast also shows that 19 policy makers believe that interest rates will fall between 3.25% and 3.5% by the end of 2025, which means a cumulative reduction of 100 basis points by 2025; We will cut interest rates by 50 basis points in 2026 and maintain them between 2.75% and 3% in the long term.
The latest interest rate forecast for the above dot matrix clearly shows a significant downward shift compared to June. However, it should be pointed out that even though the Federal Reserve's interest rate outlook has been greatly dovish, the overall outlook is still more hawkish than the current expectations of the interest rate market.
After the Federal Reserve's decision, interest rate market traders latest expect the Fed to cut interest rates to 4.10% by the end of this year, a cumulative 75 basis point rate cut (with at least one meeting in November and December to cut interest rates by 50 basis points), and to 2.917% by the end of next year (below 3%).
④ The Federal Reserve regrets it
Does the Federal Reserve regret not cutting interest rates as early as possible in July? The answer given by Federal Reserve Chairman Powell last night was: a bit!
Federal Reserve Chairman Powell stated at a press conference that if the Fed had seen the non farm payroll report released a few days after the July decision, it could have cut interest rates for the first time at the July meeting. But Powell denied that the Fed's interest rate cut had been delayed for too long, believing that the cut was a "readjustment" of Fed policy and did not believe that this action was lagging behind the interest rate curve.
Powell said, "If we had received the July employment report before the meeting, would we have cut interest rates? We likely would. We didn't make that decision at the time
Previously, the July non farm payroll report released by the US Department of Labor at the beginning of last month showed a weak US labor market, with the unemployment rate rising to 4.3%, triggering a recession warning signal for the "Sam's Rule". Prior to the Federal Reserve's July interest rate meeting, some senior figures who had retired from the Fed had actually called for a rate cut at the meeting, but the Fed, after much hesitation, ultimately did not take action.
And the Federal Reserve's sudden 50 basis point drop this time is clearly intended to make up for its failure to act in a timely manner in July.
Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said, "The dot plot does not show a further 50 basis point rate cut, which further confirms that the current changes are just the beginning and proactive, rather than a trend. This may also indicate that they regret not starting the rate cut with 25 basis points at the last meeting
⑤ Don't think that cutting interest rates by 50 basis points is a new step
It seems that in response to our previous point, Powell also emphasized in the press conference that there is no commitment to take similar measures (a 50 basis point rate cut) at every future meeting.
Powell pointed out that "readjusting our policy stance will help maintain the strength of the economy and labor market, and will continue to drive further progress on inflation as we begin to shift towards a more neutral stance. We have not taken any predetermined path. We will continue to make decisions time and time again (in meetings)
Powell said that although the Federal Reserve has lowered interest rates by 50 basis points this time, investors should not expect to continue cutting rates at this rate in the future. We have been waiting, and I believe this patience has indeed paid off. We believe that inflation will continue to move towards below 2%, so I think that's why we are taking this strong measure today, "said Federal Reserve Chairman Jerome Powell. I don't think anyone should see this and say, 'Oh, this is the new rhythm.'
Ryan Sweet, Chief US Economist at Oxford Economics, said, "The Federal Reserve does not like to admit policy mistakes, but the initial decision to significantly cut interest rates may not continue. The September decision was a preemptive measure aimed at increasing the likelihood of the central bank achieving a 'soft landing'
PIMCO economist Tiffany Wilding also wrote in a report, "We believe that the Federal Reserve will cut interest rates by 25 basis points at each of its upcoming meetings to adapt policy to the more normalized economic conditions. The Fed still relies on data, and if the rate of economic deterioration is faster than expected, policymakers will accelerate the rate of interest rate cuts
⑥ 4.4% unemployment rate
In the latest Economic Forecast by the Federal Reserve, the Fed's forecast for the unemployment rate for the next two years has clearly received attention from many industry insiders afterwards - Fed officials predict that the US unemployment rate will remain at a level of 4.4% by the end of this year and next year, and will fall back later.
Although this latest forecast level has shown a significant upward revision compared to June, it should be noted that the US unemployment rate has been at 4.3% and 4.2% in the past two months, which is still a relatively optimistic forecast. In the past, when the unemployment rate rose during economic downturns and recessions, it often continued to rise.
In fact, in this Federal Reserve resolution, people can see everywhere the current emphasis on the labor market by the Federal Reserve.
For example, in the Federal Reserve's monetary policy statement, the Fed changed the risk of achieving employment and inflation targets from a "sustained trend" balance to a "general" balance, and added a statement of "firm commitment to supporting employment maximization".
Powell also stated after the meeting that the US labor market is currently "very close" to maximizing employment, but reiterated that the Federal Reserve is aware of signs that employment growth has cooled down. He pointed out that it is evident that the number of newly added jobs has decreased in the past few months, which is worth paying attention to. The current goal of the Federal Reserve is to maintain stable inflation while ensuring that the unemployment rate does not rise.
⑦ The risk of economic recession will not 'rise'
Regarding the decision of the Federal Reserve to cut interest rates by 50 basis points, market participants were concerned beforehand whether such a significant rate cut foreshadowed the Fed seeing some little-known warning signals in the current US economic sector? Otherwise, the first interest rate cut of the Federal Reserve's loose cycle usually would not have been carried out at such a magnitude
In his latest speech last night, Powell still tried to give people a reassurance.
Powell said, "After a large-scale interest rate cut, the risk of an economic recession will not increase. I currently do not see any signs that the possibility of an economic recession has increased. I cannot see it," he continued. "You will see the economy growing at a stable rate. You will see inflation falling. You will see the labor market still at a very stable level. So, I am not seeing this (an economic recession) right now
Kristina Hooper, Chief Global Market Strategist at Jingshun, stated, "Powell made it clear that today's decision is not a crisis rate cut, but rather a normalization of monetary policy from very strict constraint levels. Given the Fed's assurance, I expect risk assets to perform well in the coming weeks - unless future economic data shows further weakness
Despite skepticism about the economic necessity of a significant 50 basis point rate cut, the market should also celebrate today's rate cut - and continue to celebrate in the coming months, "said Seema Shah, Chief Global Strategist at Principal Asset Management." The Federal Reserve will do everything in its power to avoid a hard landing. Where is a recession
⑧ We won't go back to the era of ultra-low interest rates
For the long-term interest rate environment in the future, Powell predicted last night that the era of cheap funds will not reappear.
He said, "Intuitively, most people would say that we may not go back to that (ultra-low interest rate) era, when trillions of dollars in sovereign and long-term bonds were traded at negative interest rates. My personal feeling is that we will not go back to that state again
Powell believes that the neutral interest rate may be much higher than it was at the time, although he still doesn't know exactly how high the neutral interest rate will be.
Of course, market participants currently do not fully believe Powell's above statement. From the dot plot, the Federal Reserve's latest forecast for the median long-term federal funds rate in September is 2.9%, up from 2.8% in June. But the current pricing in the interest rate market is actually expected to reach this level by the end of next year, and as for whether the Fed's interest rate cutting cycle will end in the future, perhaps no one can guarantee it at the moment.
⑨ Cutting interest rates and reducing balance sheets without any mistakes
The Federal Reserve's interest rate cut indicates that market liquidity will gradually return to a relatively loose environment, but interestingly, while the Fed is cutting interest rates, it still does not intend to immediately end its balance sheet reduction.
Federal Reserve Chairman Powell said on Wednesday that the still strong liquidity in the financial system will allow the Fed to continue reducing its balance sheet while starting to cut interest rates. Powell said, "Bank reserves are still sufficient, and it is expected that this situation will continue for some time
Powell talked about the process of so-called quantitative tightening (QT). This means that the Federal Reserve will recoup the liquidity increased through bond purchases during the pandemic, which has so far reduced its total holdings from a peak of $9 trillion in the summer of 2022 to the current $7.2 trillion. The Federal Reserve slowed down the pace of QT earlier this year, and now allows up to $60 billion of US treasury bond bonds and mortgage bonds (MBS) to expire every month.
Some analysts have previously speculated that if the Federal Reserve decides to cut interest rates by 50 basis points, it may accelerate the end of the QT policy to better coordinate the tools in the Fed's monetary policy toolbox. However, Powell pointed out at the press conference that most of the balance sheet tightening actions have not affected the bank reserves held at the Federal Reserve, and currently mainly withdraw cash from reverse repurchase instruments. The current situation indicates that even if the federal funds rate falls, 'we will not consider completely stopping the balance sheet reduction'.
A survey conducted by the Federal Reserve in July among market participants showed that they expected QT to end next spring. Federal Reserve officials have repeatedly stated that they are unsure when QT will end and will monitor market clues to determine if liquidity has tightened excessively.