The U.S. Federal Reserve started an interest rate cutting cycle for the first time after 2020, lowering the federal benchmark interest rate by 2 percentage points to 4.75%~5% in one breath. Chairman Powell said:

This interest rate cut is a "re-adjustment" by the central 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 towards 2%.

Powell firmly committed to restoring price stability while controlling unemployment

Federal Reserve Chairman Jerome Powell said the U.S. labor market is now "very close" to maximum employment, but the Fed is aware of signs of slowing employment growth. The Fed's current goal is to keep inflation stable while ensuring that unemployment does not rise higher.

He said at the press conference after the meeting:

We are trying to achieve a situation that restores price stability while avoiding the painful rise in unemployment that comes with deflation.

Investors should view the Fed's 50 basis point rate cut as a "firm commitment" to achieve this goal.

The U.S. economy is in good shape and cannot return to a world of ultra-low interest rates

Powell also reiterated that the U.S. labor market is in good condition and the Fed intends to maintain this condition through this rate cut. According to this SEP (Summary of Economic Projections), the Federal Reserve is in no rush to relax policy. He also believes that it is impossible for the United States to return to a world of ultra-low interest rates.

This SEP shows that the GDP forecast in 2024 will fall from 2.1% to 2.0%, but will remain at 2% from 2025 to 2027. The unemployment rate rose to 4.4% in 2024 from the previous forecast of 4%, while core personal consumption expenditures (PCE) prices moderated to 2.6% from 2.8%.

Dot plot shows: another 2 yards drop this year

According to the interest rate dot plot released this time, 19 Federal Open Market Committee members (including voters and non-voters) expect another 2-point cut before the end of this year, equivalent to the target range of 4.25% to 4.50%. The Fed’s remaining two meetings this year are scheduled to be held on 11/7 and 12/18.

And by 2025, rate cuts will fall by another four yards. In 2026, it will drop another 2 yards.

The Fed rarely cuts interest rates by 2 yards, focusing on achieving a soft landing

The Federal Reserve's 2-point interest rate cut in one breath is a rare situation except during crises. Philip Straehl, chief investment officer of Morningstar Wealth Americas, said that recent economic data shows that compared with other loose periods, the economy is still relatively strong, and the unemployment rate It is 4.2%, which is high year-on-year, but at the level of full employment. As of the second quarter of 2024, the annual GDP growth rate is 3.0%. He noted that 2-yard rate cuts have been extremely rare in recent decades and were typically used in emergency situations, such as the outbreak of the Covid-19 pandemic in March 2020 and during the 2008 global financial crisis.

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.

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