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There was no surprise that the Fed cut rates during the FOMC meeting last week. Market expectations were nearly even on a 25 bp or 50 bp cut and while we felt there was a slightly higher probability of the 25 bp cut, we wouldn’t have been surprised to see the larger cut. The Fed did go ahead with the rate cut and opted to go with the 50 bp rate cut instead of the 25 bps. This marked the first-rate reduction since March 2020 and signaled their change of policy as the labor market continues to cool and steady progress toward returning inflation to its 2% target.
The 50-bps cut, which brings the federal funds rate to a target range of 4.75%–5.0%, was largely seen as a proactive measure to mitigate growing risks to the labor market. Job growth has notably slowed over recent months, nearly halving from the first quarter's average of 267,000 jobs added per month, in addition, the unemployment rate has moved up from last year’s 3.4% to 4.2%. The Committee's post-meeting statement emphasized their commitment to maximum employment, with concerns that continued economic uncertainty could worsen conditions in the labor market if not addressed through policy adjustments.
Chair Jerome Powell’s characterization of the move as a "recalibration" to preserve the strong labor market underlines the Fed's dual mandate: stabilizing inflation while maintaining healthy employment levels. Powell pointed out that the risks to the labor market are growing, while inflation seems more under control. His balanced but cautious tone reflected the Committee's intent to act now to prevent more significant economic damage later.
While we had anticipated a smaller 25 bps cut, the larger reduction aligned with the Fed’s revised outlook. The Fed’s “dot plot” included in their Summary of Economic Projections (SEP) indicated that the median forecast for the federal funds rate would end the year at 4.375%, implying the likelihood of two more 25 bps cuts by year-end, with no further aggressive moves unless the economy deteriorates. This approach will allow the Fed to ease policy without overcommitting to additional large reductions unless economic data calls for it. The lone dissent in the vote came from Governor Michelle Bowman, who favored a smaller 25 bps cut. Her dissent marked the first by a governor since 2005, a notable event given the typical alignment among Board members. However, even among those supporting the larger cut, there remains a divide in outlook. Several FOMC members believe that future cuts should be more measured, with some projecting no further rate decreases this year. This reflects the ongoing uncertainty over where the neutral policy rate, the rate that neither stimulates nor restricts the economy, actually lies. The Committee's estimate of the long-term neutral rate increased slightly to 2.9%, but the range remains wide, suggesting that even Fed members are unsure of how much more easing is needed.
Looking ahead, the Fed is likely to remain data-dependent, with future cuts contingent on continued softening of the labor market and economic conditions. While the dot plot suggests two more 25 bps cuts this year, with potential for further easing in 2025, Powell’s comments during the press conference were upbeat, signaling that while inflation is under control, the labor market still has strength, and more drastic cuts may not be necessary if job data stabilizes.
Overall, the FOMC’s decision reflects both caution and confidence. The larger-than-expected cut acknowledges the need for swift action in light of a weakening labor market, but the Committee’s projections also signal a more measured approach to further cuts. The Fed is clearly trying to strike a balance between supporting employment and ensuring inflation stays in check. For now, they’ve made a bold move to ease policy, but future adjustments will depend heavily on how the economy evolves in the coming months.