Fed cuts target rate by 25 basis points, signals an easing labor market but inflation concerns loom
Summary
On Thursday, November 7, 2024, the Federal Open Market Committee (FOMC) unanimously decided to cut the fed funds rate a quarter point (25 basis points) following the prior 50-basis-point cut made at the previous September meeting. The fed funds rate now sits in the range of 4.50%–4.75%. While the market was widely expecting one rate cut to occur during this meeting, the Fed’s path forward is unclear. More specifically, the market is not pricing in a full additional rate cut in December, which would result in the Fed cutting a full point in the second half of this year.
When asked whether the election results would affect future monetary policy, Fed Chairman Powell responded, “In the near term, the election will have no effect on our policy decisions.” However, Powell noted that any change in administration could impact Fed policy as the Committee moves toward a more neutral policy. The FOMC noted that they will continue to monitor economic conditions and reaffirmed that their decision in December and the path moving forward will be based on upcoming employment and inflation data releases: “Every meeting we’re going to be looking at the incoming data and how that affects the outlook.”
Impact on rates
While market volatility remained relatively muted throughout the day, today’s Fed decision came after already heightened volatility the week leading up to and the days following the presidential election. Looking across the yield curve, the two-year Treasury is down eight bps and the five- and 10-year Treasurys are down 10 bps from yesterday’s market close. Similarly, SOFR swap rates — which directly affect hedging costs for SOFR derivatives — are down eight to 10 basis points following the Fed announcement and commentary. Since one rate cut was widely anticipated at this FOMC meeting, the market already priced a 25-basis-point cut into the forward curve, leaving rates relatively unchanged from this morning but down significantly from end of day Wednesday.
Source: Chatham Financial
Source: Chatham Financial
Source: Chatham Financial
Moving forward
Looking ahead, the market now anticipates a ~70.00% chance that the Fed will cut the fed funds rate an additional quarter point at the December meeting. Powell noted that while the Fed still expects further cuts in 2025, the level and pace of monetary easing is not clear at this time. Now that the downside risks the labor market faced have somewhat diminished since the September meeting, there is less urgency to cut rates at the pace the market previously forecasted. Looking towards December and 2025, while future monetary policy remains uncertain, the Fed will continue to closely monitor jobs, inflation, and other economic data as they determine rate policy moving forward.
Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.
24-0148
