Insight

Federal Open Market Committee (FOMC) Decision September 2024

FOMC Decision September 2024

What happened?

The Federal Reserve (Fed) decided to cut rates by 50 basis points. In addition, the dot plot anticipates a median 50 basis points more in cuts in 2024.1

Key takeaways from the SEP1 :

  • There was only a slight change in GDP forecasts (this year revised down to 2.0% from 2.1% in June). However, that suggests weakness is anticipated in the fourth quarter, given relatively solid growth thus far this year.
  • Unemployment revised up to 4.4% at end 2024 (up from 4.0% in the June estimate), 4.4% for end-2025 (up from 4.2%) and 4.3% for end-2026 (up from 4.1%). This is a significant increase upward, but clearly warranted given that unemployment is already at 4.2%.
  • Core personal consumption expenditures (PCE) was revised down slightly to 2.6% for 2024 (down from 2.8%) and 2.2% for 2025 (down from 2.3%) and remaining at 2.0% thereafter. The Fed clearly has greater confidence that inflation will reach its target.
  • Projected year-end median policy rate revised down to 4.4% for 2024 (from 5.1%), 3.4% for 2025 (from 4.1%), 2.9% for 2026 (from 3.1%), where it is expected to stay in 2027.
  • The long-run neutral policy rate was revised up slightly to 2.9% from 2.8%.

Key takeaways from the press conference:

  • Powell articulated that the Fed does not believe it is behind the curve in cutting rates, but we can interpret the 50 basis point cut as a sign that the Fed is committed to not falling behind the curve.
  • Powell offered reassurances about the economy, saying the labor market is still very healthy and unemployment is low relative to history. But he also recognized that downside risks to employment have increased. And he mentioned that unemployment was the single most important metric for the Fed in making its decision; it is clear that the weakening of the labor market was the catalyst for this rate cut.
  • When asked about the message that this decision sends to US consumers, Powell said the US economy is in a good place and the Fed is trying to keep it there.
  • Powell was asked about the stubbornness of housing inflation. He was thoughtful and said that the housing market is impacted by a number of unique factors, including structural imbalances. Because of that, he said it can take longer for housing inflation to come down, but he is confident it will normalize over time.
  • Powell reiterated confidence that inflation will reach the Fed’s target, that its patience has paid off.
  • Powell made it clear that today's decision was not a crisis rate cut but instead a normalization of monetary policy from a very restrictive level.
  • Powell stayed on point throughout the press conference, reiterating a positive view of the US economy and a desire to keep it that way. The term "recalibrating policy" was reiterated multiple times. He stressed that the Fed is committed to a "good outcome."

How have markets reacted?

The Dow rose 375 basis points in the aftermath of the rate cut, only to give up those gains. All three major US indices – the Dow, the S&P 500 and the NASDAQ – closed lower today.2

Gold briefly spiked after the decision and before the press conference – suggesting possible concerns about a recession, and then reassurances from Powell during the press conference allayed fears.

The dollar fell when gold spiked – but then reversed course, also suggesting possible concerns about a recession, and then fears allayed by reassurances from Powell during the press conference.

The 10-year US Treasury yield fell and then rose later in the afternoon, also suggesting improved sentiment around the economy. It is worth noting that small value and small core were positive today, suggesting optimism.

What is our outlook on the situation?

We think it’s very likely the Fed cuts 50 more basis points this year, although it is going to be reacting to the data and certainly could accelerate cuts if greater weakness emerges.

We believe US economy will avoid a recession and will likely experience a re-acceleration in growth in late 2024/early 2025.

What is our resulting investment view?

We continue to favor an overweight to risky assets while noting there is likely to be significant volatility in coming weeks given there will likely be continued concerns about the risks of a hard landing.

Equities. With our belief that global economic growth is likely to improve, we favor cyclical and small cap equities given relatively attractive valuations and greater sensitivity to the economic cycle. We also prefer developed ex-US and emerging markets equities for those same reasons. As central banks cut rates, we anticipate that valuations should also see support from lower discount rates.

Bonds. With the Fed just having started its easing cycle, we believe bonds offer attractive opportunities as more rate cuts unfold. Given the near-zero duration of bank loans, we expect them to be relatively Immune to interest rate volatility compared to other fixed income asset classes and could complement a fixed income portfolio. We also anticipate strong performance from emerging markets local and hard currency bonds given our expectations for a weakening US dollar.

Real estate. We are also finding more opportunities in real estate. We believe that significant negative sentiment is already reflected in the price, and there could be meaningful upside potential as the environment improves.  For example, cuts in policy rates provide scope for reductions in real estate debt costs and capitalization rates, which we believe could lead to renewed transaction activity and progress toward price recovery.

Currencies. We still anticipate the US dollar will begin to weaken this year as markets digest the Fed’s decision.

It is important to note that our tactical indicator remains negative as growth slows globally but that is a very short-term view. Our intermediate-term expectations are driven by the policy response, the normalization of the yield curve, and the resilience of the US economy.

What are the risks to our view?

There is still the potential for a recession. Unemployment is above its 36-month moving average and the yield curve has dis-inverted. The Fed kept rates at a very restrictive level for 14 months before cutting today. And so we do believe recession risks are significant but recession is not our base case.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Footnotes

  • 1

    Source: The Federal Reserve, as of Sep 18, 2024 

  • 2

    Source: Bloomberg, as of Sep 18, 2024 

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