Market View
At the September 17-18 FOMC meeting, the Federal Reserve cut interest rates by 50 basis points to 4.75-5.00% – the first cut since 2020. This cut was a relative surprise to most economists (the median Bloomberg survey forecast was for 25bps) but in line with the overall market consensus by a narrow margin. Indeed, Fed Funds futures had been pricing in a 66% chance of a 50bps cut going into the release, setting a baseline repricing of risk assets to the upside on the news. That was partly driven by important figures like Former New York Fed President William Dudley opining on a 50bps cut ahead of the meeting.
We believe the positive market reaction to the decision (in both traditional assets as well as crypto) reflects the Fed’s relatively clear communication about the future policy path. The concern going into the FOMC was that starting the easing cycle with a 50bps cut could have fueled market speculation about the depth of a US economic slowdown and thus the need for additional 50bps cuts going forward. Ultimately, we think the Fed did a good job of (1) recognizing that they were behind the curve but (2) repudiating the idea that this requires a more dovish stance than what they’ve already adopted.
That said, while the updated Fed dot plot guidance suggests two more 25bps cuts in 2024 (on November 7 and December 18), Fed fund futures are pricing in one 25bps cut in November and 50bps in December. We think that may reflect concerns about the continually cooling labor market. Notably, the nonfarm payroll (NFP) data has been revised lower for each month of 2024, with the sole exception of March. The mean revision downwards YTD has been 52M each month. This follows a year of 2023 NFP prints which had a mean monthly downwards revision of 30M. The prevalence of downward revisions paves the path towards a critical October 4th NFP release that could set the tone of future rate cut expectations.
Separate from a slowly cooling labor market though, we think the broader economic outlook appears steady and that recession risk remains low. The latest Atlanta Fed GDPNow forecast reached 3.0%, the highest since June 2024. Sustained levels of consumer spending and retail sales are also optimistic indicators for a soft landing scenario. We think this backdrop of a loosening policy environment and a resilient economy should be constructive for risk assets broadly.
Moreover, one of the more significant implications of the Fed decision, in our view, is that this now provides cover for other central banks and monetary authorities to take more stimulative measures. For example, the market was only pricing in a 20% chance that the ECB would follow up their September 12 cut of 25bps with a back-to-back reduction on October 17. Following the Fed, however, we expect the odds to spike sharply higher. More importantly, the People's Bank of China (PBOC) will review Loan Prime Rates (LPR) on September 20 (after we publish), and the Fed may have given them greater flexibility to lower rates, as 50bps alleviates pressure on the exchange rate (by lowering USD strength). This could contribute to a better overall global economic environment, which would be more conducive for risk taking.
The Fed’s decision could also have implications for the Bank of Japan which also meets on September 20, even though the BoJ appears to be on a tightening policy path. More specifically, the Fed’s 50bps cut could encourage the BoJ to delay further rate hikes for now, as a response to both Japan’s unique economic conditions and broader market stability concerns – in light of the massive short JPY carry trade unwinds in early August. That is, we expect the BoJ to take a more gradual approach to its decision making following the Fed’s strong reduction in rates, which may overall be positive for investor sentiment.
