Fed poised to cut

September 16, 2024

The Federal Open Market Committee (FOMC) – the policy setting arm of the Federal Reserve – is expected to cut rates by a quarter point at the conclusion of its meeting on September 18^th. A larger, one-half percent cut will no doubt be discussed during the meeting, but Fed Chairman Jay Powell is unlikely to have the votes to get a half percent cut in September over the finish line. We have never come so close to a major tipping point on interest rates without more certainty. Financial markets are split 50/50 on whether the cut is one-half or a quarter percent. The key for Powell will be what he can get over the finish line without a dissent from those closest to him on the Board of Governors. A dissent among a regional Fed president is easier for a Fed Chairman to swallow and could actually provide the cover the Fed needs to cut more aggressively without financial markets seeing it as a panicked move. Either way, we still expect to see a full one percent of cuts prior to year-end, which means at least one outsized cut in September, November or December.

The statement following the FOMC meeting is expected to reflect the ongoing improvement in inflation that we have seen since the July meeting and concerns about the labor market. The risks to the forecast are expected to be downgraded to reflect renewed concern about the strength of the labor market. The goal will be to “dial down” the restriction on monetary policy, while the lags on rates continue to move inflation toward the Fed’s 2% target.

The language regarding the need for more confidence before cutting will be struck from the official statement. Look for it to be replaced by more urgent language, which opens the door to larger cuts if necessary. 

The Fed is scheduled to release its quarterly Summary of Economic Projections (SEP). Participants make their projections prior to the meeting but are allowed to tweak the estimates during the meeting. That allows them to better align their forecasts with current debate.

We are expecting participants at the meeting to hold their forecasts for real GDP growth at 2.1%, the same as they did in the July meeting. The forecast for the personal consumption expenditures (PCE) index, which is what the Fed targets, is expected to come down slightly. The forecast for unemployment by year-end is expected to move up. We are already above the SEP’s 4% estimate in June for year-end.

We expect the trajectory on rate cuts to be closely split between three and four before year-end.  We expect a full percentage point in cuts by December 2024. Another one percent in rate cuts is expected for 2025; that is consistent with where the Fed was in June. The terminal rate moved up from 2.6% to 2.8% in June. It is expected to stay there in September. New York Fed President John Williams, who has considerable sway on the FOMC, has argued that he believes that the neutral or noninflationary rate may be lower.

The first order of business for the Fed will be to cut rates to avert a recession and then nailing a soft landing. The next step will be deciding when to stop.