Federal Reserve Delivers Bold 0.5% Rate Cut, Signals Further Easing Ahead

The Federal Reserve slashed interest rates by 50 basis points Wednesday at its September Federal Open Market Committee meeting, lowering the federal funds rate to a range of 4.75% to 5%. This marks the first rate cut in over four years and breaks a streak of 12 consecutive months with rates held steady.

The decision caught Wall Street analysts off guard, who had largely anticipated a more modest 25-basis-point cut. The larger reduction resonated with investor sentiment, which had leaned toward a more aggressive easing approach at the start of the rate-cut cycle.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent,” the FOMC statement says.

In its updated Summary of Economic Projections, the Fed marginally revised its forecasts. Economic growth for the current year was lowered to 2%, down from 2.1% in June, while projections for 2025 and 2026 were unchanged. Inflation projections saw downward revisions for both 2024 and 2025, while the unemployment rate was revised upward across 2024, 2025 and 2026.

Fed’s Summary of Economic Projections (Sept. 2024)

<figure class="wp-block-table is-style-stripes">

Variable	2024	2025	2026	2027	Longer Run
Change in real GDP	2.0	2.0	2.0	2.0	1.8
Jun projection	2.1	2.0	2.0		1.8
Unemployment rate	4.4	4.4	4.3	4.2
Jun projection	4.2	4.1	4.1	4.2
PCE inflation	2.3	2.1	2.0	2.0	2.0
Jun projection	2.6	2.3	2.0		2.0
Core PCE inflation	2.6	2.2	2.0	2.0
Jun projection	2.8	2.3	2.0
Federal funds rate	4.4	3.4	2.9	2.9	2.8
Jun projection	5.1	4.1	3.1		2.8

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Dot Plot Signals More Rate Cuts Ahead

The updated quarterly Dot Plot ? a tool used by the FOMC to signal its future policy intentions ? indicates a more aggressive path for rate cuts than previously projected.

The September median projection now points to 100 basis points of cuts in 2024, with the federal funds rate expected to fall to a midpoint of 4.4% by the end of this year. This suggests the Fed could enact 25 basis-point cuts at both the November and December meetings.

Further into the future, the Dot Plot signals the fed funds rate will drop to between 3.25% and 3.5% by the end of 2025, implying an additional 100 basis points of cuts. By the end of 2026 and the newly introduced projections for 2027, interest rates are expected to fall to 2.9%.

This outlook marks a significant shift from the Fed’s June projections, which anticipated only one rate cut in 2024, followed by 100 basis points of cuts in both 2025 and 2026.

All eyes now turn to Fed Chair Jerome Powell‘s press conference at 2:30 p.m. ET, where he is expected to provide further insights into the central bank’s decision and its outlook for the economy.

Market Reactions: Dollar Tumbles; S&P 500, Gold Mark All-Time Highs; Small Caps Rocket

The 50-basis-point rate cut triggered a sharp fall in the value of the U.S. dollar, with the greenback weakening across the board, particularly against the Japanese yen which rose by 1%.

The?Invesco DB USD Index Bullish Fund ETF tumbled 0.3% after the Fed’s decision.

Treasury yields also fell markedly, pushing bonds higher. The iShares 20+ Year Treasury Bond ETF (TLT) rose 0.2%.

Gold prices soared 1%, with the SPDR Gold Trust setting fresh all-time highs. The S&P 500, as tracked by the SPDR S&P 500 ETF Trust (SPY) rose 0.4%, also hitting record highs.

Small caps were the absolute winner in the post-Fed decision, with the iShares Russell 2000 ETF (IWM) rallying by 1.5%.

Key Takeaways:

• Rate decision: 50 basis points cut to 4.75%?5%.
• Economic projections: Lower growth and inflation forecasts, higher unemployment projections.
• Potential rate path: Dot plot signals 50 basis points more in cuts in 2024 and another 100 basis points in 2025.

Now read:

• 20 S&P 500 Stocks That Move The Most When The Fed Starts Cutting Interest Rates

 Image created using artificial intelligence via Midjourney.