Rate Cuts Have Arrived!

September Monthly Economic Market Update
Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer
September 27, 2024

Federal Open Market Committee (FOMC) members elected to cut the federal funds rate by 50 basis points during their September meeting. After the cut, the official rate range is 4.75 to 5%, but this does not mean interest rates—the costs associated with borrowing—are within that range for all loans. The Federal Reserve sets this rate to dictate the interest rate that banks must pay when they borrow from other banks on an overnight basis. This rate on overnight lending between banks has significant downstream effects that change the interest rates on commercial loans, auto loans, mortgages, and more. Money will essentially become cheaper to borrow for businesses and individuals as a result of the FOMC decision to slash rates. Growth, inflation, and the unemployment rate are all affected by this decision because it will change the amount of borrowing and investment that occurs in the economy. Rates are typically hiked to keep inflation low and lowered to keep employment at maximum sustainable levels by fostering economic growth.

The central bank’s September decision was a pleasant surprise for financial markets, with major indices rising to new heights (record highs for the DJIA and S&P 500). The FOMC had kept the fed funds rate at its previous level of 5.25 to 5.5% for well over a year, and this rate cut shows that the Fed is no longer committed to restrictive policy, which is a major green light for investors. Most economists agreed that it was time for the cutting cycle to begin, with some prominent economists even arguing that it should have begun at the FOMC’s last meeting in July. All of the FOMC members saw the need for cuts too, but there was a surprising point of dissent not seen during Jerome Powell’s tenure as chair of the Fed. Taking issue with the size of the cut, Federal Reserve Governor Michelle Bowman was the first governor to dissent from an interest rate decision since 2005. Understandably, Bowman does not want to risk reinflation when inflation is finally close to the target rate of 2% and the economy has been robust despite a weakening labor market. On the other side of the discussion, proponents of the 50-point cut argue that inflation is under control and the Fed should seek to be proactive instead of reactive. As a data-driven entity, the Federal Reserve is often backward-looking, meaning that they primarily rely on trends in past data instead of forecasts to make decisions. This has led to situations in the past where the Fed waited too long for more data and got burned as a result (most recently during the inflation episode of 2021-2022). As the bold rate decision suggests, this Fed seems to be learning from previous mistakes. We have yet to see what the broader impact of looser monetary policy will be at this time, but optimism for a soft landing and continued growth is high.

At his press conference following the FOMC meeting, Jerome Powell expressed optimism and confidence in this US economy where GDP grew by 3.0% in Q2, and projections have Q3 growth at 2.5%. He acknowledged that the Fed’s “intention is really to maintain the strength that we currently see in the US economy.” As for inflation concerns, recent PCE—Personal Consumption Expenditures—index readings certainly support the Fed’s decision to loosen monetary policy by cutting interest rates. For the month of August, PCE and Core PCE­—excluding volatile food and gas prices—prices rose by 0.1%, bringing the year-over-year increases to 2.2% and 2.7%, respectively. We need more data to determine the effect this cut will have on inflation in the coming months, but those numbers are remarkably close to the Fed’s target year-over-year inflation rate of 2%. Ideally, inflation will continue cooling in 2024 and hold steady between 2 and 2.5% for 2025. In the meantime, all eyes will be watching how the Fed’s outlook evolves, and what federal funds rate they plan on targeting as this cycle gets underway.

Sources:
https://www.capitalgroup.com/advisor/insights/articles/fed-just-cut-interest-rates-now-what.html
https://www.wsj.com/economy/central-banking/the-fed-aims-to-repeat-greenspans-1990s-masterpiece-69613b85
https://www.crossmarkglobal.com/wp-content/uploads/Dolls-Deliberations-Weekly-Investment-Commentary_092324_FINAL.pdf