Fed's Bold 50 Basis Point Rate Cut: Analyzing Market Reactions and Outlook

What if the Federal Reserve's latest decision could reshape the economic landscape? Join us as we dissect the seismic impact of the Fed's bold move to cut interest rates by 50 basis points on September 18th. We'll unpack the intimate details from the meeting, from GDP projections and employment forecasts to the anticipated path for inflation and the Fed funds rate. Discover why the balance of risks has shifted and what this means for the future of monetary policy. 

In this episode, we also explore the immediate market reactions, with equities surging and the dollar taking a hit. Get insights straight from the press conference, highlighting a cooling labor market and increased confidence in achieving the 2% inflation target by 2026. Learn how these developments might influence future rate cuts and the broader economic outlook. Tune in to our comprehensive analysis and stay informed on the latest updates from the Federal Reserve's landmark decision.

I guess you can say go big or go home. It is Wednesday, eptember the 18th, and we got the much anticipated Fed meeting today and we've talked about this. There's been a lot of back and forth between 25 basis points or 50 basis points and they went all in. They went with 50 basis points. Today I'm going to break down what's happening because, as we are doing this podcast, we're still also in the middle of a very long press conference that he does after the meeting. But the initial release was the cutting by 50 basis points. What they did was state that the balance of risks to their dual mandate, which is employment and inflation, that those risks are now in balance. There was one dissenter on this, and this is important because they try and usually get these unanimous and this is the first time that someone's dissented since 2005. And they mentioned also that they'll continue to assess for additional adjustments. Now let's talk about their forecast, because they also put this projection material out, where they talk about their forecast for employment, for GDP, for inflation and for the Fed funds rate. There was no major change to GDP. They're expecting the economy to grow 2% actually for the next four years. They expect 50 more basis points of rate cuts this calendar year. So there are two more meetings, and one in November and December. So that would suggest maybe 25 basis point increments in those meetings and then a hundred basis points of cuts next year. So a slowdown in the interest rate cuts next year. They also said that they won't reach that 2% inflation which is their target until about 2026. They expect employment to be 4.4% by the end of this year and that's up from 4% that they had in their projection in their last meeting at June. They also lowered the core PCE, which is that inflation indicator, their favorite inflation indicator, from 2.8 in their June meeting to 2.6%.

Some of the comments that have come out of the press conference and remember the press conference he gets asked a lot of the same questions, just in maybe different wording. Basically he's mentioning that the labor market is cooling. He continues to mention the risks now remain more balanced. Inflation has eased substantially and now they have much greater confidence that inflation will move to that 2% target. They basically continued to reiterate that this is just a removing of the restrictive policy, so almost like a normalization. They also assured us that they'll make decisions meeting by meeting. They will recalibrate the policy stance if they need to, if they need to go quicker or slower. And then they also mentioned that the projections that were put forth in those materials I just discussed are projections if all of their economic projections come true. So if the unemployment rate moves higher, if inflation continues to come lower, then they have the ability to continue to cut interest rates. If those things do not materialize, then that can change as well.

What's the market doing on this? Initially, obviously, equities surged on this information. We had triple-digit gains in the Dow. As the press conference has gone on and we see this often that it just loses some of the steam it went a little negative. It's basically around flat right now. By the time we get back to our desks it might be a little bit different, but equity markets definitely like the fact that they did the 50 basis points. In the bond market we now finally have a positive yield curve, meaning that the two-year yields are lower than long-term yields. So you've seen some of the long-term yields rising on this news.

Some of the other big movers are the dollar. The dollar is getting hit very hard today on a 50 basis point move from the Fed. Remember the Fed was one of the most aggressive central banks and has been on hold for so much longer. A lot of other central banks have already cut, so the dollar is down. It is testing that psychological level of 100 on the dollar index Gold. Lastly, that was the other thing that also actually surged on, it being 50 basis points as opposed to 25 basis points. That's all we have today. If you like this podcast, please subscribe. Hit that alarm bell. If you'd like more of our podcasts, please, you can go to marketswithmegan. fm. Thank you.