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Fed Rate Cuts Underway: Frontloaded “Recalibration”
A larger-than-expected 50-basis-point rate cut kicks off the Fed’s strategy to recalibrate monetary policy while balancing inflation and employment concerns.
- Markets & Economy
- Central Banks
- Monetary Policy
- Commentary
Key Points
What it is
The Federal Reserve launched a significant 50-basis-point rate cut to begin recalibrating its stance on monetary policy to align with current economic dynamics.
Why it matters
Fed Chair Powell described the outsized rate cut as a “strong start” to recalibrating its stance on monetary policy, reflecting confidence that inflation is on track to meet the two percent target.
Where it's going
Powell cautioned against expectations of additional 50-basis-point cuts down the road, noting that the FOMC would “go carefully” from here.
The announced an outsized, 50-basis-point rate cut after its September meeting. Fed Chair Jay Powell characterized the move as a “strong start” to the process of (as he put it) “recalibrating” the stance of monetary policy. While we were surprised by the front-loaded nature of the process, we continue to expect that, based on our views on the economic outlook, the Fed is likely to proceed carefully from here. Let’s take a closer look.
Powell characterized the outsized rate cut as “a sign of confidence” that inflation is coming down sustainably to the Committee’s 2 percent target. He also noted that the labor market was in “solid condition,” and the rate cut was intended “to keep it there.” He returned to this point several times, perhaps to counter the interpretation that the larger rate cut indicated heightened concerns about the overall health of the U.S. economy. But we couldn’t help notice that he also mentioned “risk management” as a factor behind the . And, in this regard, he reiterated that, while the risks to achieving the inflation target had decreased, the risks related to the unemployment rate had increased.
Powell cautioned against expectations of additional 50-basis-point cuts down the road. He noted that the FOMC would “go carefully” from here, making decisions on a “meeting-by-meeting basis.” On several occasions, he pointed to the Summary of Economic Projections (SEP), where the median policymaker forecast painted a very gradual pace of rate cuts going forward: the equivalent of only two 25-basis-point cuts for the rest of this year, and an even slower pace of cuts next year (the equivalent of 25 basis points at every other FOMC meeting).
Our views on U.S. monetary policy are always shaped by our take on the U.S. economy. We continue to anticipate a “soft landing” scenario, where inflation glides down to 2 percent, helped by a deceleration in economic growth next year to a little below its potential rate. This view is less optimistic than the median FOMC projection, which suggests the economy will grow at close to its potential rate year after year. As a result, we expect the FOMC to cut rates next year a little faster than implied by the median SEP projection. Looking ahead, we will keep a close watch on inflation data, but we will also be paying attention to any signs of deterioration in the labor market.
The Federal Open Market Committee (FOMC) of the Federal Reserve holds eight regularly scheduled meetings a year to review economic and financial conditions and determine monetary policy. It sets the federal funds rate target, which is achieved through open market purchases by the Federal Reserve and has a broad impact on interest rates in the financial system and the economy. The committee consists of 12 members from regional reserve banks.
Main Point
Fed Signals Confidence with Bold Rate Cut, Plans Gradual Moves Forward
The Fed’s recent 50-basis-point rate cut marks the beginning of a strategic recalibration. Chair Powell describes it as a “strong start” to guiding inflation toward the two percent target while managing labor market risks.
Antulio N. Bomfim
Head of Global Macro – Global Fixed Income
Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.
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