The US Federal Reserve has started a rate cut cycle for the first time since 2020, lowering the federal benchmark interest rate by 2 points to 4.75%~5% in one go. Chairman Powell said:
This rate cut is a "recalibration" by the Bank, and our patient approach over the past year has paid off. Inflation is now closer to our target, and we are more confident that inflation will continue to move toward 2%.
Powell firmly promises to restore price stability while controlling unemployment
Federal Reserve Chairman Jerome Powell said the U.S. labor market is "very close" to maximum employment, but the Fed is aware of signs of slowing job growth. The Fed's goal now is to keep inflation stable while ensuring that the unemployment rate does not rise.
He said at a press conference after the meeting:
We are trying to achieve a situation that restores price stability while avoiding the painful rise in unemployment that would come with deflation.
Investors should view the Fed's 50 basis point rate cut as a "firm commitment" to achieving that goal.
The U.S. economy is in good shape and a return to a world of ultra-low interest rates is out of the question
Powell also reiterated that the U.S. labor market is in good condition and the Fed intends to maintain this situation through this rate cut. According to the SEP (Summary of Economic Projections) this time, the Fed is not in a hurry to relax its policy, and he also believes that it is impossible for the United States to return to a world of ultra-low interest rates.
The SEP shows that the GDP forecast for 2024 has dropped from 2.1% to 2.0%, but will remain at 2% from 2025 to 2027. The unemployment rate in 2024 will rise from the previously predicted 4% to 4.4%, while the core personal consumption expenditure price (PCE) will slow down from 2.8% to 2.6%.
The dot plot shows that the price will drop by another 2 yards this year.
According to the interest rate dot plot released this time, the 19 members of the Federal Open Market Committee (including voters and non-voters) expect another 2 basis points reduction by the end of this year, equivalent to a target range of 4.25% to 4.50%. The remaining two meetings of the Federal Reserve this year are scheduled for 11/7 and 12/18.
By 2025, the rate cut will be reduced by another 4 basis points. In 2026, it will be reduced by another 2 basis points.
The Fed rarely cuts interest rates by 2 yards, focusing on achieving a soft landing
The Fed cut interest rates by 2 basis points in one go, which is a rare situation except in crisis events. Philip Straehl, chief investment officer of Morningstar Wealth Americas, said that recent economic data showed that the economy is still relatively strong compared with other easing periods, with an unemployment rate of 4.2%, which is higher than the same period last year, but at a full employment level, and an annual GDP growth rate of 3.0% as of the second quarter of 2024. He pointed out that a 2 basis point interest rate cut is extremely rare in recent decades and is usually used in emergency situations, such as the outbreak of the Covid-19 pandemic in March 2020 and during the global financial crisis in 2008.
This more aggressive rate cut shows that the Fed is satisfied that the downward trend in inflation is sustainable and is now turning its focus to achieving a soft landing.
