Fed starts cutting with 50bps move lower

The Federal Reserve cut the Fed Funds rate by 50bps at the September FOMC meeting, taking the upper bound to 5.0%. The statement accompanying decision noted that the Fed had “gained greater confidence” that inflation would reach its 2% target and that risks to the dual mandates of stable prices and full employment are “roughly in balance.” There was one dissent to the decision with governor Michelle Bowman voting for a 25bps cut.

The Fed also released a new summary of economic projections (SEP), tempering their 2024 real GDP forecast expectation for 2024 to 2% from 2.1 % in June but holding their outlook for the next several years at 2%. For unemployment, the Fed had to revise its forecast higher given conditions in the labour market have weakened and it now projects unemployment at the end of 2024 at 4.4% (from 4% previously and not much higher than the 4.2% hit in August). On inflation, the Fed revised its projection for PCE inflation for 2024 downward to 2.3% from 2.6% in June and to 2.1% in 2025 (from 2.3% previously). Inflation is anticipated to hit target levels by 2026. The most notable chance in the SEP was to the dots plot where the median projection for the Fed Funds rate at the end of 2024 is 4.4%, implying an additional 50bps of cuts from the September decision via either an additional 50bps or two 25bps moves. For 2025, another 100bps of cuts are projected though there appears to be a dovish bias with eight policymakers favouring five or more cuts.

In his press conference following the decision, Fed Chair Jerome Powell said that the Fed was “not in a rush” to adjust policy lower and that the Fed would keep the flexibility to move faster or slower on cutting rates as appropriate. Chair Powell also stressed that while the Fed started its rate cutting cycle with a 50bps move, it would not be the “new pace.” Powell also stressed that while the Fed can only observe the impacts of the neutral rate of interest, rather than identify it directly, it was probably higher than it had been and thus longer run interest rates would likely also need to be higher.

CPI inflation in the UK held steady at 2.2% y/y and 0.3% m/m, both in line with expectations. The annual headline rate was unchanged from the previous month, while core inflation came in at 3.6% y/y, as expected but up from the 3.3% recorded in July. Services inflation accelerated to 5.6%, from 5.2% previously. The Bank of England is likely to hold at its meeting today, but the fact that services inflation undershot its own projections for 5.8% is supportive of more rate cuts through the end of the year, even as energy base effects will likely push headline inflation higher once more.

Today’s Economic Data and Events

15:00 UK Bank of England rate decision. Forecast: 5.00% (hold)

15:00 Turkey TCMB rate decision. Forecast: 50.00% (hold)

16:30 US initial jobless claims, week to September 14. Forecast: 230,000

Fixed Income

• The commentary from Jerome Powell was interpreted as fairly hawkish despite the change to the dot plot, and this was reflected in USTs which sold off yesterday.
• Yields on the 2yr added 1bps to 3.6172%, while the 10yr closed 6bps higher at 3.7038%.

FX

• The dollar index lost 0.3% against its peers yesterday, although it has recovered those losses in early trading this morning as repositioning starts post the Fed meeting.
• Sterling was a notable gainer as it climbed 0.4% to 1.3214, with yesterday’s CPI inflation print diminishing the likelihood of a cut from the BoE today. EUR closed all but flat at 1.1119, while JPY strengthened 0.1% to 142.29.

Equities

• The S&P 500 briefly hit a new record high yesterday, but ultimately equity markets took Powell’s comments as a hawkish signal and all three major US indices ended the day 0.3% lower.
• Similarly in Europe, the DAX dropped 0.1%, the CAC 0.6%, and the FTSE 100 0.7%.
• Locally, the DFM and the ADX both closed 0.1% lower.

Commodities

• Oil prices fell yesterday despite the Fed cut and rising Middle East tensions, with focus on a weak demand outlook still. EIA data from the US showed that gasoline demand had sunk below 9mn b/d for the second week in a row.
• WTI closed down 0.4% to USD 70.9/b, while Brent futures ended the day 0.1% lower at USD 73.7/b.