The big news for investors in September was the Federal Reserve slashing interest rates by one half of a percentage point (50 bps) on Wednesday, September 18th and setting the stage for potentially two additional cuts by year-end, followed by as much as four more in 2025.
The decision came in a near unanimous vote, with only one dissenter, at the conclusion of the Fed's two-day policy meeting as officials cut the Central Bank's benchmark rate by 50 basis points to a new range of 4.75%-5.00%.
A reversal of the restrictive monetary policy held by the Fed since the spring of 2022 should be welcome news. As shown in Figures 1 and 2, a lower Fed Funds Rate has been a bullish signal for both stock and bond market investors.
Since 1929, the S&P 500 has increased over the 12 months following the beginning of a rate cutting cycle over 85% of the time.
Figure 1: S&P 500 return 12 months after first rate cut(1)
Average one-year fixed income returns have also been positive after the first rate cut.
Figure 2: Fixed income 1-yr returns after the first rate cut(2)
The September 18th action marks the Fed's first rate reduction since the Pandemic in 2020 and what many hope to be the end of its most aggressive inflation-fighting campaign since the 1980s where the target Fed Funds Rate (FFR) was raised to its highest level in 23 years (5.25%-5.50%). The FFR can affect mortgages, auto loans, student loans, revolving lines of credit and credit card interest rates.
The most recent release of the Fed's "dot plot" (Figure 3) indicated that 19 Federal Open Market Committee (FOMC) members, both voters and non-voters, forecast the benchmark FFR to be at 4.4% by the end of this year, equivalent to a target range of 4.25% to 4.50%. For the remainder of 2024, nine officials forecasted four cuts, seven forecasted three cuts, two forecasted two cuts and one forecasted five cuts. The Fed's two remaining meetings for the year are scheduled on Nov. 6-7 and Dec.17-18.
When considering additional rate cuts, Powell said the Committee will assess incoming economic data and the balance of risks. Fed Officials supported their decision citing increasing concerns about a slowing labor market and gaining confidence inflation is likely heading back down to their 2% target.
The Fed has a dual mandate, full employment and stable prices.
Several Fed Officials thought a cut could have been made at the Central Bank's last meeting in July, according to recently released minutes. In late August, while in Jackson Hole, Powell all but put a bow on future rate cuts as he specifically noted that the Fed does not "seek or welcome further cooling in labor market conditions" and that the current level of the policy rate gives the Fed "ample room" to lower rates in response to any weakening in the job market.
Looking ahead, the Fed paints an optimistic picture of the US economy. The outlook for interest rate projections comes as Fed officials now forecast the unemployment rate ticking up to 4.4% from its previous forecast of 4.0%. Inflation for 2024 is forecasted at 2.6% and 2.2% in 2025. Finally, the economy is seen growing at 2.0% instead of 2.1% for 2024 and hovering around 2.0% in 2025 and 2026.
(3) Powell also noted that the consumer has been resilient, supply for goods expanding, energy prices moderating, gross domestic product (GDP) solid and wage growth pressures easing.
All of these economic factors highlighted by Powell in his press conference are quite compelling and can hopefully lead to a moderately expanding economy, with stable prices and low unemployment, leading us back into a goldilocks scenario in 2025 and beyond.
SOURCES
- What Past Fed Rate Cycles Can Tell Us
Schwab.com
- How do bonds perform one year after the Fed's first interest-rate cut of a cycle?
MarketWatch.com
- September 18, 2024: FOMC Projections materials, accessible version
FederalReserve.com
Home
