Fed Policy Pivot: The Federal Reserve lowered its benchmark borrowing rate by 0.50% in September. While a cut was expected, the magnitude of the cut caught some economists by surprise.
Disinflation Trend Getting Close to the Conclusion: The August CPI reading showed consumer prices up only 2.5% y/y, the lowest reading since March 2021.
Cutting From a Position of Strength: We believe the Fed acted from a position of strength, proactively cutting rates to prevent policy from being overly restrictive and causing undue harm to the economy.
Yield Curve Continues to Normalize: The short end of the yield curve came down more than longer dated maturities in August, putting the 10/2 spread firmly in positive territory.
Equity Markets Continued to Advance in September: For the fifth consecutive month, the S&P 500 finished higher, rising by 2.1% in September. The index is now up 22% for the year on a total return basis.
Data Over the Last Year Has Been Consistent with our View: With inflation falling and the economy continuing to grow, the key themes we have been discussing for more than a year have largely played out consistent with our view.
Equity Markets
September data was all about the Federal Reserve. In response to progress on inflation and the overall balance of risks, the FOMC lowered the target range for the federal funds rate by 50 basis points to a range of 4.75%-5.00%. While futures markets were pricing in a little better than a 50% chance of a cut of this magnitude, it caught many economists by surprise. To us, this was the Federal Reserve acting from a position of strength, understanding that the real federal funds rate (the current target rate minus the core PCE price index) is still restrictive.
In response, by lowering rates faster, the Federal Reserve is proactively adjusting policy to avoid causing undue harm to the economy. We’ve written for a while about the economy normalizing, and now it is time for monetary policy to normalize as well.
The summary of economic projections, which is the median of the FOMC members’ forecasts for inflation, unemployment, GDP growth, and the federal funds rate, were also updated at the September meeting. The committee’s median estimates for inflation came down for 2024 and 2025, while economic growth was revised slightly lower to 2% for both years. The median estimate for the federal funds rate shows another 50bps of rate cuts for the remainder of the year and another 100bps next year. The Fed will remain data-dependent, meaning that their forecasts are subject to change based on incoming economic information. That being said, the Fed’s rate move was a strong signal that monetary policy normalization is underway and falling inflation is allowing the committee to focus on supporting economic growth.
Fed Policy Pivot
Fed Policy Pivot
Fed Policy Pivot
Highlights
Equity Markets
September data was all about the Federal Reserve. In response to progress on inflation and the overall balance of risks, the FOMC lowered the target range for the federal funds rate by 50 basis points to a range of 4.75%-5.00%. While futures markets were pricing in a little better than a 50% chance of a cut of this magnitude, it caught many economists by surprise. To us, this was the Federal Reserve acting from a position of strength, understanding that the real federal funds rate (the current target rate minus the core PCE price index) is still restrictive.
In response, by lowering rates faster, the Federal Reserve is proactively adjusting policy to avoid causing undue harm to the economy. We’ve written for a while about the economy normalizing, and now it is time for monetary policy to normalize as well.
The summary of economic projections, which is the median of the FOMC members’ forecasts for inflation, unemployment, GDP growth, and the federal funds rate, were also updated at the September meeting. The committee’s median estimates for inflation came down for 2024 and 2025, while economic growth was revised slightly lower to 2% for both years. The median estimate for the federal funds rate shows another 50bps of rate cuts for the remainder of the year and another 100bps next year. The Fed will remain data-dependent, meaning that their forecasts are subject to change based on incoming economic information. That being said, the Fed’s rate move was a strong signal that monetary policy normalization is underway and falling inflation is allowing the committee to focus on supporting economic growth.
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Aspirations are what help make goals reality.