Fed cuts rates by 50 basis points – Dot plot calls for more in 2024

Key points

• The FOMC cut rates for the first time in four years.

• The 50 basis point reduction was largely in line with expectations.

• The Fed's dot plot indicates that there will be additional cuts this year.

The FOMC cut rates for the first time in four years, reducing the federal funds rate by 50 basis points.

The Federal Open Market Committee (FOMC) lowered the federal funds rate for the first time since March of 2020.

The FOMC lowered rates by 50 basis points to the 4.75% to 5.00% range, from the previous 5.25% to 5.50% range, where it had been since July of 2023.

While the move to lower rates was widely expected, there had been uncertainty about how much rates would fall. In recent weeks, due to solid economic news and the inflation rate dropping to 2.5%, there had been an increasing number of experts and analysts who believed the Fed would cut rates by 50 basis points.

That indeed was the case, as the markets surged higher on the news. All of the major indexes spiked on the news at 2:00 p.m. ET. As of 3:00 p.m. ET, the small cap Russell 2000 had the biggest gain, up 37 points or 1.7%. The S&P 500 climbed 27 points or 0.5%, while the Dow Jones jumped 157 points or 0.4%. The Nasdaq lagged, rising 21 points, or 0.1%.

Risks are in balance

In the statement, the FOMC said inflation has made further progress toward the Fed’s 2% goal, while the economy has continued to expand at a solid pace and the unemployment rate remains low. The committee added that the risks to achieving its employment and inflation goals are roughly in balance.

“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4.75 to 5 percent,” the committee said in the statement.

Additional adjustments to the target range for the federal funds rate will be based on incoming data, the evolving outlook, and the balance of risks.

“We are not on any preset course,” Fed Chair Jerome Powell said during the press conference that followed the news release. “We will continue to make our decisions meeting by meeting. We know that reducing policy restraint could hinder progress on inflation. At the same time, reducing restraint too slowly could unduly weaken economic employment.”

The FOMC added that it will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.  

Overall, 11 of the 12 members voted for a 50-basis point cut, while one member, Michelle Bowman, favored a 25-basis point reduction.

Dot plot calls for more cuts this year

The Fed also released the quarterly summary of projections (SOP), or dot plot, which featured updated expectations based on the progress made since June. Notably, the consensus among committee members targets the federal funds rate to be 4.4% by the end of 2024, down from previous projections of 5.1% at the end of 2024.

That would suggest that rates would fall another 50 basis points this year to the 4.25% to 4.50% range over the course of two more FOMC meetings in November and December.

Further, the consensus among committee members targets the federal funds rate to be 3.4% at the end of 2025, 2.9% by the end of 2026, and 2.9% at the end of 2027.

As for inflation, the FOMC’s dot plot expects Personal Consumption Expenditures (PCE) inflation to be at 2.3% at the end of 2024, 2.1% at the end of 2025, and 2% at the end of 2026.

Markets react

Rate cuts had largely been priced into the market in recent weeks, so markets reacted accordingly, rising modestly on the news. The biggest gainer was the Russell 2000, as small caps have the most to gain from lower rates.

“I believe the market got what it wanted, but I worry that the Fed, by expressing greater comfort with inflation, has become more dependent on employment data for the remainder of the year,” David Barrett, CEO of London-based EBC Financial Group, said. “Employment has effectively become their main priority. If we see deterioration in this area, they may face pressure to take more action than they initially intended.”

While the 50-point cut was largely expected and did not have a major impact on markets Wednesday, they could certainly provide a boost for many stocks going forward.

“The Fed’s 50 basis points cut can certainly provide a tailwind by improving liquidity and potentially stimulating more exit activity,” said Natalie Hwang, Founding Managing Partner of Apeira Capital. “A true acceleration of exits, however, depend on other favorable conditions—such as stronger economic growth, improved public market performance, and renewed investor confidence—would need to align. The rate cut may act as a catalyst, but its impact will be contingent on how these broader dynamics evolve.”  

The next FOMC meeting is scheduled for Nov. 6 – 7.