For the first time in over four years, the Federal Reserve lowered the Fed Funds interest rate during its meeting on Wednesday of this week. The reduction in rates (known in financial circles as a “cut”) was 50 basis points (0.50%), making the new target range of the Fed Funds rate 4.75-5%

The size of the cut had become a major topic of debate in recent weeks – as had the likely tone & tenor of the Fed Chair Jerome Powell’s commentary. We had been predicting (and hoping) that the cut would be 50 basis points and the commentary would focus on normalization to an appropriate terminal rate level (versus a need to quickly lower rates to avoid a recession). We got exactly what we had predicted/hoped for! We were pleased – and markets also seem to be pleased with the events as they rallied sharply on Thursday, the day after the announcement.

Let’s look at the Fed’s decision in a bit more detail:

Goodbye “transitory”, hello “recalibration”

Over the past few years, the Fed has used the word “transitory” with great frequency (as they commented on their thoughts that inflation would come and go in time). The new buzz word of the Fed is recalibration – a word used nine times in Powell’s press conference.

Powell repeatedly described the Fed’s moves as an “adjustment,” a “recalibration,” or a “normalization” of interest rates. Nothing more, nothing less. He focused on the cut being a move in the direction of the likely long-term targeted rate (~3%) and not an emergency measure to avoid a growth slowdown. We believe this was a very key part of the commentary (and critical to achieving a positive market reaction). Here’s to recalibration!

Jobs in Focus

We wrote about this concept last month and it was reaffirmed in yesterday’s meeting. Remember – the Fed has a dual mandate (meaning they are responsible for and concerned with two (sometimes competing) priorities – stable prices (ie: keep inflation at reasonable level) and full employment (ie: strong job market). For the past three years, inflation has been in the drivers seat (as job growth was taking care of itself).

Times have changed and as inflation has moderated, job markets have started to show some signs of cooling. Powell reaffirmed this dual focus and paid special attention to the job market in his commentary (noting that the “balance of risks” has shifted). It was clear that Fed relied on the job market weakness as cover to cut 50 basis points (versus 25).

Economy Remains Solid

As noted above, the fear going into the announcement (which has likely led to rocky markets before this week in September) was that a large rate cut would indicate economic weakness and a shaky outlook for the US economy. Powell was very forceful in his commentary, likely meant to address those very fears. Here are three quotes illustrating that:

“The [U.S. economy] is solid…and our intention with our policy move today is to keep it there”

“I don’t see anything in the economy that suggests that the likelihood of a recession, of a downturn, is elevated”

“You see growth at a solid rate, you see inflation coming down, and you see a labor market that is still at very solid levels.”

What Comes Next?

The estimate of the “dot plot” (ie: various Fed official rate forecasts) shows a rate of 4.25% to 4.5% by the end of 2024 (while the interest rate futures predict 4-4.25%). While the Fed did leave the door open and said (as they have been saying for years now) that they will remain data dependent, it certainly appears the overall trend line will be down. With one cut behind us, markets will soon look to the size and pace of future cuts.

Before worrying about the future, it’s worth reflecting for just a moment on all that the country and the economy (and its citizens, including you) has endured in the past 4 years. After all of that, having an economy that is supportive of an orderly retreat from the highest benchmark interest rate seen in two decades, is a win for the Fed, markets, and Americans.

Onward we go,