Fed review: Going for the soft landing

• The Federal Reserve cut rates by 50bp in the September meeting, against our call for only a 25bp cut. The new policy rate target is 4.75-5.00%.
• The updated dots signal a total of 50bp of additional cuts in 2024, 4x25bp of cuts in 2025 and 2x25bp cuts in 2026. Relative to our call, the Fed signals a longer but more gradual rate cutting cycle.
• Powell downplayed recession risks despite the larger-than-expected cut, and most of the decline UST yields and weakening in USD FX reversed over the course of the press conference.

Markets were historically divided between 25bp and 50bp cuts going into the FOMC’s September decision. Powell accompanied the larger rate reduction with an overall positive assessment of the economy, ending the press conference saying: ‘I don’t see anything in the economy right now that suggests likelihood of a downturn is elevated.’

The larger move was motivated by a significant shift in the Fed’s risk assessment. 12 out of 18 participants saw risks to unemployment rate tilted to the upside (prev. 4 participants), and the median unemployment rate forecast was revised up through 2024 2026. While GDP forecasts were left mostly unchanged, 7 participants saw risks tilted to the downside also for growth (prev. 3). Inflation is seen stabilizing to 2% faster than previously expected with a balanced risk outlook.

Powell also mentioned that ‘it feels to me that neutral rate is probably significantly higher than it was pre-pandemic’. The median long-term ‘dot’ shifted to 2.9% (from 2.8%) with 7 participants now seeing the long-term rate at or above 3.25% (prev. 4). So, while the risk assessment and distribution of individual dots suggest that the Fed is open for faster rate cuts in the near-term if needed, rates could stabilize at a higher level longer-term.

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