{"id":197978,"date":"2024-09-23T09:53:15","date_gmt":"2024-09-23T09:53:15","guid":{"rendered":"https:\/\/ibkrcampus.eu\/campus\/?p=197978"},"modified":"2024-09-23T10:45:31","modified_gmt":"2024-09-23T10:45:31","slug":"starting-with-a-bang-fed-cuts-policy-rate","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.eu\/campus\/traders-insight\/starting-with-a-bang-fed-cuts-policy-rate\/","title":{"rendered":"Starting With a Bang: Fed Cuts Policy Rate"},"content":{"rendered":"\n<p>Originally Posted, 18 September 2024 &#8211; <a href=\"https:\/\/www.pimco.com\/eu\/en\/insights\/starting-with-a-bang-fed-cuts-policy-rate\">Starting With a Bang: Fed Cuts Policy Rate<\/a><\/p>\n\n\n\n<p>Following its September meeting, the U.S. Federal Reserve announced its first interest rate cut since 2020 \u2013 and did it with a bang. The central bank lowered the policy rate by 50 basis points (bps) and slashed its forward rate projections. The new median projection sees the policy rate ending 2025 in the range of 3.25%\u20133.5%, which is 150 bps lower than the current range and much closer to long-run neutral monetary policy estimates.<\/p>\n\n\n\n<p>The Fed\u2019s actions suggest that it saw a shift in the balance of risks around inflation and employment, warranting a faster adjustment toward neutral than many officials had previously thought. Historically, looking at Fed cycles since the mid-20th century, an initial rate cut of 50 bps has typically preceded or signaled a recessionary easing cycle \u2013 that is, a generally sharper, deeper, or more prolonged series of rate cuts aimed at bolstering a struggling economy.<\/p>\n\n\n\n<p>We do not believe the U.S. economy is currently in recession; consumer spending remains resilient, and investment growth appears to be accelerating. However, as inflationary pressures subside, the Fed appears focused on ensuring U.S. growth and labor markets remain strong by aligning monetary policy with today\u2019s economy \u2013 which looks much more \u201cnormal\u201d now that the series of pandemic-related shocks that drove high inflation have largely subsided.<\/p>\n\n\n\n<p>We believe the Fed is on a path to ease policy by 25-bp increments at each of its upcoming meetings. However, the Fed remains data-dependent. If the labor market deteriorates more quickly than expected, we expect the Fed to cut more aggressively.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-a-lot-can-change-in-three-months\">A lot can change in three months<\/h2>\n\n\n\n<p>Fed officials made significant revisions to its economic and interest rate projections relative to June. Employment and inflation data since then have surprised many investors and sparked some market volatility. The balance of risks to the Fed\u2019s dual mandate has shifted somewhat away from inflation \u2013 still slightly above target but moving sustainably in a good direction \u2013 and toward employment, which remains relatively strong but shows signs of weakening.<\/p>\n\n\n\n<p>The Fed\u2019s updated median economic projections for year-end 2024 reflect this recent data: Officials raised their unemployment rate projection to 4.4% (up from 4.0%) and lowered their core inflation projection to 2.6% (down from 2.8%). These changes informed the 75-bp downward revision to the median interest rate projections for both 2024 and 2025. The Fed likely aims to normalize policy more quickly to bolster employment and support economic growth more broadly.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-u-s-economy-and-policy-returning-to-normal-conditions\">U.S. economy and policy returning to \u2018normal\u2019 conditions<\/h2>\n\n\n\n<p>As the economy is likely normalizing, so too should monetary policy. While the transition back to normal need not be disorderly, it could make the economy more vulnerable to unforeseen shocks, especially if monetary policy remains overly restrictive.<\/p>\n\n\n\n<p>With inflationary pressures subsiding, and real GDP growth and hiring slowing, the Fed appears more closely focused on ensuring the economy remains strong. We believe this view is consistent with the faster path toward neutral policy rates implied by Fed officials\u2019 new interest rate projections. This rate trajectory likely depends on continued U.S. economic resilience; indeed, median Fed forecasts indicate consistently solid 2% growth, with the unemployment rate stabilizing just 20 bps above current levels. The rates market has now priced in a cutting cycle typical of a soft landing (or nonrecessionary) cutting cycle, but the market could still anticipate steeper cuts if recession risks increase materially. Overall, we think the Fed likely has room to cut rates further under a range of economic scenarios.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-range-of-views\">Range of views<\/h2>\n\n\n\n<p>The September Fed meeting also highlighted the range of views among officials. Governor Michelle Bowman dissented in favor of a 25-bp cut, marking the first dissent by a board member since 2005. The \u201cdot plot\u201d projections for 2024 suggest that the decision between a 25- and 50-bp cut was close, with nine officials preferring either no cuts or just one more cut by year-end. The other nine officials appear to support a sequence of 25-bp cuts following September\u2019s initial 50-bp reduction.<\/p>\n\n\n\n<p>The wide range in interest rate forecasts for 2025 \u2013 spanning 125 bps among the various officials \u2013 highlights the elevated uncertainty surrounding the future of the economy and policy. Inflation in August (as measured by the Consumer Price Index) was firmer than expected, a reminder that while risks have diminished, inflation has not yet returned to the Fed\u2019s target. However, the recent loss of momentum in the labor market poses a risk of undershooting, which explains the Fed\u2019s decisively dovish initial rate cut.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-implications-for-investors\">Implications for investors<\/h2>\n\n\n\n<p>Historically, intermediate-maturity bonds have tended to outperform cash during Fed interest rate cutting cycles. Learn more about investing during rate-cutting cycles in our recent <em>PIMCO Perspectives,<\/em>\u00a0&#8220;<a href=\"https:\/\/www.pimco.com\/eu\/en\/insights\/cuts-and-consequences\">Cuts and Consequences<\/a>.&#8221;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Starting With a Bang: Fed Cuts Policy Rate 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