Interest Rate Cuts Accelerate: Insights from September Fed Meeting

Labor market weakness prompts the Federal Reserve to cut interest rates.

At this interest rate meeting, the Fed decided to lower the benchmark interest rate by 50 basis points to a target range of 4.75%-5%, and simultaneously reduce other related benchmark interest rates.

In addition, continue to implement the balance sheet reduction at the original pace.

The dot plot published in September shows that the expected median target rate for 2024 is 4.1%, significantly lowered from June, indicating that there will be at least a 50bp rate cut expected in the remainder of this year, with 7 officials believing that another 50bp cut should be made within the year, and 9 officials believing that another 75bp cut should be made.

The decision to cut rates was not unanimously approved, with Governor Bowman voting against the decision, believing that a 25bp cut should have been made.

In the latest FOMC statement, in addition to "committing to restoring inflation to the 2% target," the Fed added a new statement to "commit to achieving maximum employment."

Federal Reserve Chairman Powell said at the press conference that the upward risk of inflation has diminished, while the downward risk of employment has increased.

Given that the risks to achieving employment and inflation targets are roughly balanced, the FOMC decided to cut rates at this meeting.

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However, the 50bp rate cut does not mean that the Fed is rushing to act, nor will it become the norm.

The Fed will continue to make decisions on a meeting-by-meeting basis.

If the economy remains robust and inflation persists, the policy will be withdrawn more slowly; if the labor market unexpectedly weakens or inflation falls faster than expected, it is also prepared to respond.

The cooling of employment is an important basis for the 50bp rate cut this time, and Powell said that if the employment data had been known before the July meeting, it might have been considered to cut rates at the July meeting.

We believe that, on the one hand, the US labor market continues to cool down, with the number of new non-farm employment positions tending to decrease this year, and the previous numbers being revised down, the unemployment rate has increased, and wage growth has continued to slow down.

On the other hand, the inflation rate continues to be in a downward channel, with the year-on-year growth rate of CPI falling significantly from the high in 2022, and the leading indicators of core goods and core services prices both indicate that future inflationary pressures will continue to ease.

Overall, the weakening of the labor market is the main basis for the Fed's 50bp rate cut, and it is expected that at least a 25bp rate cut will be made at each meeting until the end of this year.

The unemployment rate expectation is raised, and there is more progress in inflation expectations.

In terms of employment, the committee changed the employment growth from "moderated" to "have slowed."

In terms of inflation, the committee changed the wording from "has eased over the past year" to "has made further progress toward the Committee's 2 percent objective," and added the statement "has gained greater confidence," judging that employment and inflation have shifted from "moving into balance" to "roughly in balance."

In the economic indicator forecast, the Fed raised the unemployment rate expectation for 2024 from 4% to 4.4%, and the expectation for 2025 also increased to 4.4%.

In addition, the Fed expects more progress in inflation, lowering the PCE expectation for 2024 to 2.3%, and reducing the core PCE expectation to 2.6%.

Powell pointed out at the press conference that the labor market has cooled down from the previous overheated state and will continue to cool down.

A series of broad indicators show that the labor market is no longer as tight as it was in 2019, and the labor market is not a source of inflationary pressure.

Inflation has eased significantly in the past two years and is still higher than the 2% target, but long-term inflation expectations of businesses and forecasters have remained stable.

The Fed's goal has always been focused on inflation, and now that inflation is close to the target and there is more confidence in its continued decline, it does not mean that the fight against inflation has been won.

In terms of employment, the number of new non-farm employment positions has been decreasing in recent months, with previous numbers being revised down, and the unemployment rate has increased after the weather factors disappeared in July, further showing signs of cooling in the US labor market.

The September US Beige Book shows that although the overall employment level is stable, some companies are only hiring necessary positions, and wage growth is moderate.

In terms of inflation, the year-on-year growth rate of PCE prices shows a long-term downward trend, and the CPI growth rate fell to 2.5% in August due to the decline in oil prices, and the core CPI price year-on-year growth rate has stalled, but the leading indicators of core goods and core services prices both indicate that future inflationary pressures will continue to ease.

The GDP growth expectation is lowered.

In terms of economic growth, the committee believes that recent US economic activity is still "expanding at a solid pace."

In the economic indicator forecast, the expected median value of the US real GDP growth rate for 2024 was lowered to 2%, and the economic growth expectation for 2025 and 2026 remained unchanged at 2%.

Powell believes that recent economic activity continues to expand at a robust pace, with consumer spending growth remaining resilient, and investment in equipment and intangible assets also recovering from weakness, but housing investment fell in the second quarter.

Over the past year, the improvement of the supply chain has supported the strong performance of the US economy.

In addition, Powell believes that there are currently no signs that the possibility of an economic recession is increasing.

US economic activity is slowing down.

The September Fed Beige Book shows that only three regions have slightly increased economic activity, while the number of regions reporting flat or declining activity has increased to nine.

Most regions have seen a decline in consumer spending, and most regions have seen a cooling of manufacturing activity, with mixed results in residential construction and real estate activity.

Recently, US real consumer spending has remained strong, with income slowing down but not significantly falling; industrial output growth has warmed up, and the growth rate of total sales of real manufacturing and trade industries has increased steadily, with production and trade activities remaining stable.

Overall, the indicators of US economic activity remain healthy but have slowed down overall.

There is still at least a 50bp rate cut expected within the year.

After the Fed's decision was announced, the three major US stock indexes first rose and then fell, US Treasury yields fell, and the US dollar index fell sharply.

On the one hand, the risk in the labor market is highlighted, with the number of new non-farm employment positions tending to decrease over the long term, the unemployment rate has increased, and wage growth has slowed down, showing signs of fatigue in the US labor market.

On the other hand, price pressures are easing.

The US economic activity remains healthy but has slowed down overall, with real consumer spending remaining strong, income slowing down, and production and trade activities remaining stable.

Powell said that if the employment data had been known at the July meeting, it might have been considered to cut rates at the July meeting.

The Fed cut rates by 50bp this time, or it may consider that the policy rate adjustment is lagging behind the data.

In addition, Powell also said that the subsequent 50bp rate cut will not become the norm, and the Fed is not in a hurry to act.

As the Fed's policy turns, several major central banks have entered the rate-cutting phase.

Future economic growth will continue to slow down, and as the labor market continues to cool down, the Fed may still have at least a 50bp rate cut within the year.