• Fed begins new easing cycle, cutting the Fed Funds range 50bp.
• New Fed Funds range is 4.75% to 5%.
• Unemployment has “moved up.”
•  Acknowledges that inflation “remains somewhat elevated.” 
•  Fed views risks to employment and inflation goals in balance.

And finally

Today, the Federal Reserve’s Open Market Committee cut the Fed Funds target range by one-half of a percent. This starts a new rate cutting cycle that should play out over the next year to year and a half. Markets were pricing six rate cuts back in January and have had their hopes repeatedly dashed for a cut until today.

Looking ahead, 17 of the 19 members estimated there would be two or more cuts the rest of this year. That implies one more half percent cut or two quarter point cuts at each of the two remaining meetings this year. Rates markets continue to undershoot the Fed and are pricing a full 1% cut by mid-December. 

So soon

At the June meeting, 11 of 19 committee members thought the Fed would either cut a quarter point once later this year or hold rates steady. Despite several former members discussing a cut, the “big” half-percent move is quite a change in view for the committee in two and half months. Past half-percent changes at the start of a rate cut cycle were in reaction to falling growth and rapidly rising unemployment. Neither are present today.

Chairman Powell emphasized rising unemployment in his August Jackson Hole speech and press conference today. We would point out that the unemployment rate bouncing between 4.1% and 4.3% is largely noise. Rate cuts happening at today’s low level of unemployment is only matched by the January 2001 level of 3.9%.

Rate changes just before an election have happened in the past, most notably in 2008. Those cuts were understandable in light of the failures of Bear Stearns, Merrill and Lehman. In the few cases where the Fed did change rates before an election, the direction of rate changes continued. We may have missed one, but this is the first instance we can find of a Fed changing policy direction inside of 11 months before an election.  

Climbing

Chair Powell remarked in June and at August’s Jackson Hole symposium that employment was becoming a larger factor in the Fed’s decisions about rates. Today’s quarterly summary of projections follows that thinking as the committee forecasts unemployment rising to 4.4%. In June, the committee was forecasting a 4% rate.

Also rising is the Fed’s view of the long-run average for the Federal Funds rate. At the end of 2023, the committee’s opinion hovered around 2.5% versus today’s 2.9%. If the goal of 2% inflation would be reached, then an interest rate nearly 1% greater than inflation would continue the current stance of restrictive policy.

One aspect of the Fed’s management of monetary conditions is their buying of Treasury bonds. They continue to buy bonds, averaging $150 million per month, per the latest Treasury activity release. As the mortgage securities on the Fed’s balance sheet mature, some of the proceeds are reinvested in Treasury securities. 

Summary

Chair Powell emphasized that the Fed remains “data dependent.” Given some of the early reads on third quarter growth, quarter-percent cuts look more likely than another half of a percent. Larger cuts are consistent with recession level growth — not the case today. A recession is not in the cards this year given the amount of government spending.

We think the “large*” cut today has more to do with Powell not wanting to disappoint the bond market and the fact that Federal interest payments on our $35 trillion in debt are now in excess of $1 trillion per year.

Market reactions after Powell’s press conference were mixed — reflecting “buy the rumor, sell the news.” Fear not, markets like cheaper money.

Please let us know how we can help you.

• Do you miss the days of Fed Chair Paul Volcker? We do — cuts and hikes of 3% were common, not the minor-league 0.5% move today. 

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. 

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