Original author: Zhang Yiwei
Original source: Zhibao Investment Research
summary
At this meeting, the Federal Reserve cut interest rates for the first time to start a new cycle, by 50 basis points to 4.75%-5.0%.
There were major changes in the wording of the meeting statement, emphasizing that greater confidence has gained in the continued decline in inflation to 2%.
Regarding the job market, the statement noted that employment growth "has slowed" and the unemployment rate has risen but remains low.
Regarding the risk management stance, the statement declared that the risks to achieving the dual goals of employment and inflation were "roughly in balance."
The Committee is firmly committed to adding “supporting maximum employment” alongside “restoring inflation to the 2 percent goal” and bringing the employment target forward.
The FOMC rate decision had its first dissenting vote since September 2005: Michelle W. Bowman, who favored a 25 basis point rate cut at this meeting.
The main change in the economic forecast is reflected in the upward revision of the unemployment rate forecast. The unemployment rate is expected to remain unchanged at 4.4% in 2024 and 2025 (4.0% and 4.2% respectively in June), and 4.3% in 2026 (4.1% in June), reflecting the digestion of the new information provided by QCEW. The inflation forecast was slightly lowered, with core PCE expected to be 2.6% in 2024 (2.8% in June), 2.2% in 2025 (2.3% in June), and 2.0% in 2026.
Most interest rate dot plots predict that there is still 50 basis points of room for interest rate cuts this year. Taking into account the two remaining meetings in 2024 on November 6-7 and December 17-18 (including the dot plot and economic forecasts), it reflects that the Fed’s decision this time is a front-end interest rate cut.
At the press conference, Powell released a more obvious hawkish signal, repeatedly emphasizing that the committee is "in no rush" and will gradually "recalibrate" the Fed's monetary policy stance.
As the market digested the Fed's meeting statement and Powell's press conference information, the three major U.S. stock indexes all gave up their intraday gains and eventually closed slightly lower; U.S. Treasury yields rose (bearish steep); the U.S. dollar index bottomed out and rebounded. Gold prices hit a record high and then plummeted, with an intraday range of more than $50.
Original statement
The language removed from the June statement is shown in blue with a strikethrough
The additional wording from the September statement is underlined in blue
The red letter is the corresponding Chinese translation
Dot Plot and Economic Forecasts
No more interest rate cuts this year (2 digits)
Another 25 bps drop this year (7th place) vs. another 50 bps drop this year (9th place)
Another 75 bps drop this year (1 digit)
Conference Highlights
The decision to reduce the interest rate by 50 basis points reflects our growing confidence that, with appropriate recalibration of our policy stance, we can sustain a strong labor market in the context of moderate growth and inflation continuing to decline toward 2%. We have also decided to continue reducing our securities holdings.
With inflation declining and the labor market cooling, upside risks to inflation have diminished, while downside risks to employment have increased. We now view the risks to achieving our employment and inflation goals as roughly balanced, and we closely monitor risks to both ends of the dual mandate.
We have no preset path and will continue to make decisions meeting by meeting.
Question and Answer Session
CNBC: What changes have occurred that led the committee to choose to cut interest rates by 50 bps? Will there be another 50 bps rate cut in the future? How should the market judge it?
A: We've received a lot of data since our last meeting. We received two employment reports, July and August. We also received two inflation reports, one of which was released during the quiet period. We also received the Quarterly Census of Employment and Wages (QCEW), which indicated that the nonfarm payrolls data we had may have been false and would be revised down in the future, which everyone knew. We also saw anecdotal data, including the Beige Book. We took all of this data, went into the quiet period, and thought about what action to take. We concluded that this was the right thing to do for the American economy and the people we serve, and we made the decision.
A good place to start in judging the pace of future rate cuts is with the SEP. We will make decisions on a meeting-by-meeting basis based on incoming data, the changing economic outlook, and the balance of risks. Looking at the SEP, you see a process of recalibrating our stance of policy from where it was a year ago when inflation was high and unemployment was low to a stance that is more consistent with where we are today and where we expect to achieve our goals. This recalibration will be gradual. There is nothing in the SEP to suggest that the Committee is in a “no rush.” This recalibration process will evolve over time.
The SEP is, of course, a forecast, a baseline forecast. I talked about in my remarks that the actions we actually take will depend on the direction in which the economy evolves. We can speed up, we can slow down, we can pause, it all depends on the circumstances (“if appropriate”), but this is what we will be considering. Again, I encourage you to think of this SEP only as an assessment of the Committee’s thinking today, but the thinking of each member of the Committee is based on the assumption that their respective forecasts are realized.
AP: The SEP shows that the federal funds rate will still be above the long-term neutral rate estimate by the end of next year. Does this reflect that interest rate levels are restrictive? Does this threaten continued weakness in the job market, or does it mean that people believe the short-term neutral rate is too high?
A: In our baseline scenario, we expect to continue to remove restrictive policies and watch how the economy responds. Looking back, our policy stance in July 2023 was based on an unemployment rate of 3.5% and inflation of 4.2%. Today, unemployment is at 4.2% and inflation is just above 2%.
Now is the time to recalibrate our policy stance to bring it more in line with progress toward more sustainable levels of inflation and employment. The balance of risks is now even. The direction of the recalibration is toward the neutral interest rate, and the pace of our recalibration will be determined in real time as circumstances dictate.
Reuters: This is the first time since 2005 that a committee member voted against the rate. Was the decision of 25 bps vs 50 bps very difficult? Will the pace set this time guide every subsequent meeting until next year?
A: The decision the committee voted to make had broad support.
We will make decisions on a meeting-by-meeting basis. The committee is in no rush. We've made a good start, and frankly, that's really a sign of our confidence. We are confident that inflation will continue to fall to 2%. To me, the logic (of frontloading rate cuts) is clear from an economic perspective and a risk management perspective. We will proceed cautiously meeting by meeting and make decisions in real time.
New York Times: SEP shows that the unemployment rate will remain at 4.4% after climbing to that level. However, historical experience shows that once the unemployment rate has been rising for a period of time, it will not stop but continue to rise. Why do you think the labor market will stabilize?
A: The labor market is in good shape. The policy actions we are taking today are designed to keep it that way. The same is true for the economy as a whole. The U.S. economy is in good shape. It's growing at a solid pace. Inflation is coming down. The labor market is strong. We want to keep it that way. That's what we're doing.
