Fed rate cut reaction

The Fed cut rates by 50 bp in response to the tame behaviour of inflation over the past few months and the loosening of conditions in the labour market, as a pre-emptive move against a further increase in the unemployment rate. The “dot plot” with the forecasts of the different FOMC members is broadly consistent with a smaller cut of 25bp at each of the remaining meetings of 2024, though still more hawkish than market expectations.

The key data point that brought the Fed around to a jumbo cut seems to have been the annual revision to the payroll data that indicated job creation had been significantly overestimated, and in fact the Fed’s expectations for future unemployment levels were revised mildly upwards.

However, at the press conference Chair Powell made it clear that the Fed is not particularly worried about a significant deterioration of the job market and described the US economy as “strong. Hence, we see this as a “neutral” cut.

Nevertheless, the Fed has now launched a full-on easing cycle with a forceful move. The focus shifts now to what will be the bottom of rates, and how fast we get there.

As to the former, the “dot plot” indicates a long-term level of 3% is being targeted, whereas the latter will be data dependent. This move opens the way to a generally weaker dollar and offers welcome relief in particular to emerging market currencies that have struggled so far this year.