September Rate Cut: What It Means for Future Fed Policy

For the first time in over four years, the Federal Reserve has lowered its interest rates, a decision announced by Jerome Powell at the September 18th, 2024 FOMC meeting. The 50-basis-point reduction brings the target range down from 5.25%-5.5% to 4.75%-5%. Powell explained that this adjustment was driven by recent economic data, reflecting the Fed's confidence in the overall health of the U.S. economy.

The U.S. economy has shown steady growth in 2024, with GDP increasing by 2.2% on an annualized basis in the first half of the year. Current projections for this quarter suggest similar growth, in line with the Fed's expectation of 2% growth for the full year. Consumer spending has remained strong, while investments in equipment and intangible assets have shown improvement, indicating ongoing economic resilience.

At the same time, inflation appears to be gradually cooling, bringing the Fed closer to its 2% target. The latest inflation data shows that the Consumer Price Index (CPI) rose by 0.2% month-over-month in August for the second consecutive month, while year-over-year inflation eased to 2.5%, down from 2.9% in July, further supporting the Fed's progress towards stabilizing prices.

Source: Bureau of Labor Statistics - US Department of Labor

Despite the substantial rate cut, Powell emphasized that future cuts of this magnitude should not be seen as a pattern. The labor market remains a critical focus, with the unemployment rate rising slightly by 0.2 percentage points in August to reach 4.2%. Projections indicate that unemployment could peak at 4.4% over the next two years, yet the overall job market remains stable, with job gains slowing only slightly.

Source: Bureau of Labor Statistics - US Department of Labor

Following the rate cut, U.S. stock markets initially responded positively, with both the S&P 500 and Dow Jones indices seeing short-term gains. However, following Powell’s conference, market sentiment shifted, and both indices closed lower—down 0.29% and 0.25%, respectively. Meanwhile, Treasury yields fell slightly, reflecting increased bond prices.

Looking ahead, the market anticipates that the Fed may implement additional rate cuts before the end of the year and will continue easing monetary policy.

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