Financial News for the Week of September 20th, 2024

There was no doubt heading into this week that the Federal Reserve would be cutting its policy rate on Wednesday. What remained in question, was the size of the cut. Right up until the announcement, market pricing remained relatively split on whether the FOMC would cut by 25 or 50 basis points (bps). Ultimately, policymakers opted for the bigger cut and signaled more easing to come. The more dovish tilt pushed U.S. equity markets higher, with the S&P 500 up just over 1% for the week at the time of writing.

Accompanying the policy statement, the FOMC also released revised economic forecasts, known as the Summary of Economic Projections (SEP) in financial news. The SEP is an aggregation of each Committee members’ individual forecasts but are not “official” Fed projections. Overall, the median forecast showed that the growth outlook remained little changed relative to the June forecast, with GDP still expected to expand by 2.0% per-year between 2024 and 2027. However, the unemployment rate was revised higher for both 2024 and 2025, and core PCE inflation was marked down in both years.

Consistent with the FOMC’s expectations for a slightly softer labor market, and cooler inflation, there were notable downward revisions to the median interest rate outlook (i.e., the “dot plot”) for 2024 through 2026. The revised forecast now shows a total of 100 bps of easing by the end of this year (previously 25 bps) with another 100 bps of cuts projected for 2025, corresponding to a target range of 3.25%-3.5% (Chart 1).  This is 75 bps lower than the June SEP.

In the press conference, Chair Powell characterized the larger cut as a “strong start”, but also reiterated that future reductions in the policy rate were by no means on a preset course. Moreover, the Chair pushed back on the notion that this week’s outsized move was driven by a fear that the FOMC had fallen behind the curve. However, he did state that had the FOMC known back at the July 30-31 meeting that the labor market would have cooled as much as it did in the months that followed that rate decision, they probably would have started the easing cycle sooner.

As noted in our recent Quarterly Forecast, we feel that odds favor another 50-bps cut in November. If policymakers are truly concerned that today’s policy stance is too restrictive, it’s more likely that they will want to act quickly to alleviate the pressure, before slowing the pace in December.

This is not a guarantee. The Fed remains data dependent, and nearly all economic data out this week including retail sales, industrial production, housing starts, and initial jobless claims came in better than expected, and remain consistent with an economy that’s still expanding in the 2-2.5% range. Next week’s personal income and spending data will provide more insight on August spending trends and is also likely to show a bit more progress on easing inflationary pressures (Chart 2). But it’s the September and October employment reports that could ultimately be the deciding factor of whether the Fed cuts by 25 or 50 bps in November.

Thomas Feltmate, Director & Senior Economist | 416-944-5730