Fed’s Upcoming Rate Move: A Looming 25‑bp Cut
After more than a year of keeping the fed funds rate steady, the Fed’s policy panel is finally ready to start trimming the levers again. The September FOMC is set to dip the target range by 25 basis points, landing it at 5.00% – 5.25%, the first cut since the pandemic’s early days.
What Markets Are Saying
- The USD OIS curve already prices in the 25‑bp move, plus a roughly one‑in‑three chance that the panel will pull another 50 bp if conditions warrant.
- Despite the odds, the panel’s vote on a 25 bp cut is almost guaranteed to be unanimous.
- Market participants expect the statement to remain general—no concrete guidance on when the next cuts will happen.
Why the FOMC Keeps the Door Open
Policy will stay data‑driven. Decision makers will keep watching incoming numbers, the evolving outlook, and the balance of risks. In September’s language, the Fed will emphasize that price stability and full employment are now balanced—”our strong commitment” to bring inflation back to target also ensures we keep the labor market solid.
Financial Market Anticipation
- Some traders feel let down by the absence of direct policy signals, especially since the OIS curve is hedging a total of 100+ bp cuts this year.
- The key debate is not how large the cut will be but how fast the rate will return to its neutral footing, which economic theory places around 3% in nominal terms.
- Currently, the curve’s aggressive pace suggests a hurry‑up vibe. However, other G10 central banks are playing it slow—cutting once a quarter.
Frequently Asked Questions
FOMC members are expected to walk a tightrope between a brisk easing schedule and a more measured trajectory, maintaining policy flexibility in the face of uncertainty.
Economic Projections: A Quick Refresher
The June projections are getting a spring update. Here’s what the new dots are looking like:
- Median dot now says 75 bp of cuts in 2024 (up from 25 bp) plus another 100 bp in 2025, aiming to reach a neutral rate of 3.00%–3.25% by late next year.
- The long‑run dot stays flat at 2.75%.
- Dispersion is broader than usual—policy makers aren’t all on the same page yet.
Labor Market Outlook
The U.S. economy’s momentum is slowing: the 12‑month moving average of payrolls has slipped below 200 k for the first time, and unemployment ticked up to 4.3% in July (highest since Oct 2021) before easing back to 4.2% in August.
Expect a modest upward tweak to the 2024 unemployment forecast—while the long‑term picture stays unchanged to protect the job market.
Inflation is Getting a Turnaround
- Headline CPI jumped 2.5% YoY in August, the slowest rise in three years.
- PCE inflation, the Fed’s favourite measure, also eased to a headline 2.5% and core 2.6% in July.
- Market sentiment now leans bullish on the Fed’s confidence that inflation is on track to hit the 2% target.
Forecasts now shave about 0.1–0.2 basis points off the inflation plan across the horizon, but they won’t jolt a bold understretch at the 2% goal.
Growth Forecasts
The U.S. economy’s resilience keeps some optimism alive:
- It has been growing at over 2% annualised for seven of the last eight quarters.
- The Atlanta Fed’s GDPNow model projects about 2.5% growth for the quarter ending in September.
- Policy watchers expect a slight bump in this year’s growth projection.
Powell’s Post‑Meeting Press Briefing
Chair Powell will likely keep the press tight, refusing to pin down the pace of future cuts. His usual refrain—drawing on his Jackson Hole commentary a month ago—will underline growing confidence that inflation is closing in on the 2% target, and that any further labor‑market cooling will be avoided.
Implications for Financial Markets
- September’s FOMC is a volatile event, with a 1‑in‑3 chance of a larger 50 bp move still on the table.
- A hawkish‑than‑expected cut could spark a surge in U.S. dollars and pressure on equities and Treasuries.
- In the longer view, what matters most for investors is the Fed’s readiness to pull rates back by up to 5 % and to pause or stop quantitative tightening if needed—essentially a strong “Fed put.”
With the dual mandate risks now balanced, this policy safety net offers a reassuring backstop for medium‑term sentiment, keeping equity pullbacks shallow and letting the risk curve head for higher numbers.
Stay tuned for the next Fed decision, and let’s keep an eye on how quickly those easing moves stack up—and whether the Fed’s “political jazz” will keep the market dancing!
