Fed cuts 50 basis points, an accelerated start to the monetary easing cycle
Summary
On Wednesday, September 18, 2024, the Federal Open Market Committee (FOMC) voted to reduce the fed funds rate to a target range of 4.75%–5.00%, marking the first rate cut in over four years. While the reduction in rates was widely expected, the magnitude of 50 basis points comes to the surprise of some market participants expecting a more standard 25-basis-point cut. Prior to the meeting, the market was split on whether the Fed would cut 25 or 50 basis points, a rare occurrence in the post-financial crisis era. The FOMC statement shifted focus from inflation to employment, noting "Job gains have slowed" and that the "Committee has gained greater confidence that inflation is moving sustainably toward two percent."
The Fed also updated its quarterly Summary of Economic Projections, showing a median expectation of a full percentage point in cuts by the end of the year, inclusive of today's cut, implying 50 basis points in total cuts between now and the end of the year.
Impact on rates
In the months leading up to today’s FOMC meeting, rates had fallen significantly — two-year rates had fallen 85 basis points since the July FOMC meeting, and 10-year rates had fallen 40 basis points as the market’s expectations for aggressive rate cuts increased during the period. Immediately following the FOMC’s “double cut” announcement, rates fell, reflecting some measure of surprise on the 50-basis-points announcement. Two-year swap rates fell about 10 basis points, while the 10-year fell a more modest four basis points. In both cases, rates have rebounded somewhat since. During Chair Powell’s press conference following the announcement, he affirmed the Fed’s confidence in the “jumbo cut” to reflect current labor market and inflation conditions, while expressing flexibility in the Fed’s ability to pivot if the data were to swing in either direction.
Source: Chatham Financial
Moving forward
Importantly, while today's cut marks the inception of the rate-cutting cycle and has an immediate impact on short-term rates, medium-term rates still reflect significant further policy easing from the Fed. Following today’s decision, the forward curve is pricing in three more cuts (75 basis points) by the end of the year and a total of seven to eight cuts between now and the end of 2025. In comparison, the Fed’s updated dot plot shows a more modest path of rate cuts — the median dot plot indicates two cuts by the end of the year, with only one policy maker showing three cuts. By the end of 2025, the dot plot indicates six additional cuts from today’s level.
The Summary of Economic Projections also featured several changes since its June release; the Fed reduced its year-end GDP growth estimate from 2.10% to 2.00%, increased its unemployment forecast from 4.00% to 4.40%, and reduced its estimate for PCE inflation from 2.60% to 2.30%. The Fed’s forecasts imply the scenario of a “soft landing” whereby inflation comes down and unemployment remains anchored. That said, all eyes will now turn to the labor market and inflation data, which precede the next FOMC meeting on November 7.
Source: Summary of Economic Projections
Economic and market update
Join Jackie Bowie and Amol Dhargalkar for Chatham’s upcoming webinar, where they will discuss the unprecedented shifts in capital markets during 2024 and look ahead to the macroeconomic drivers for 2025.
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.
24-0126
