Overview of the key points of the Federal Reserve's September interest rate meeting: pre-cut, hawkish guidance

Original author: Zhang Yiwei

Source of the original text: Zhibao Investment Research

Summary

• At this meeting, the Fed cut interest rates for the first time, starting a new cycle, by 50 basis points, to 4.75% -5.0%.
• The wording of the statement has changed significantly, emphasizing greater confidence in inflation continuing to decline to 2% (has gained greater confidence).
• Regarding the job market, the statement points out that the employment growth rate has slowed, and the unemployment rate has risen but remains low.
• Regarding the Risk Management stance, the statement declares that the risks of achieving the dual goals of employment and inflation are roughly in balance.
• “The Committee is strongly committed” to add “supporting maximum employment” alongside “returning inflation to a 2% target” and prioritizing the employment target.
• FOMC Interest Rate decision sees first descent since September 2005: Michelle W. Bowman, who leans toward a 25 basis point rate cut at this meeting.
• The main change in economic forecast is reflected in the upward revision of the unemployment rate forecast. The unemployment rate is expected to remain at 4.4% in 2024 and 2025 (compared to 4.0% and 4.2% in June forecast), and 4.3% in 2026 (compared to 4.1% in June forecast), reflecting the digestion of new information provided by QCEW. The inflation forecast has been slightly lowered, with core PCE expected to be 2.6% in 2024 (compared to 2.8% in June forecast), 2.2% in 2025 (compared to 2.3% in June forecast), and unchanged at 2.0% in 2026.
• Intrerest Rate point grid most predict that there is still 50 basis point interest rate cut space this year, considering the two meetings on November 6-7 and December 17-18, 2024 (including the dot matrix and economic forecast), reflecting that the Fed’s decision this time is a pre-cut.
• Powell released a more significant hawkish signal at the press conference, emphasizing multiple times that the committee is “in no rush” and will gradually “recalibrate” the monetary policy stance of the Federal Reserve.
• As the market digests the Federal Reserve meeting statement and Powell’s press conference information, the three major U.S. stock indexes all gave back their intraday gains and ended the day with slight declines; U.S. bond yields rose steeply; the U.S. dollar index bottomed out and rebounded. After reaching a new historical high, the gold price plummeted, with an intraday fluctuation of over $50.

Original Statement

The wording removed from the June statement is in blue with a strikethrough.

The wording added in the September statement is for the blue text with an underline.

Red characters correspond to the corresponding Chinese translation

Grid Charts and Economic Forecasting

No further interest rate cuts within the year (2 digits)

Cut rates by 25 bps (7 digits) during the year, compared to cutting rates by 50 bps (9 digits) during the year

Cut by another 75 bps (1 bit) within the year

Key Points of the Press Conference

The decision to cut interest rates by 50 basis points reflects our growing confidence that, by appropriately recalibrating our policy stance, we can maintain a strong labor market in the context of moderate rise and inflation continuing to decline to 2%. We also decided to continue reducing our holdings of securities.

With the decline in inflation and the cooling of the labor market, the upward risk of inflation has weakened, while the downward risk of employment has increased. We now believe that the risks of achieving the employment and inflation targets are roughly in balance, and we closely follow the risks at both ends of the dual mandate.

We don’t have a predetermined path and will continue to make decisions on a meeting by meeting basis.

Q&A Session

CNBC: What changes have occurred that led the committee to choose a 50 bps rate cut? Will there be another 50 bps rate cut in the future, and how should the market judge?

A: Since the last meeting, we have received a large amount of data. We received two employment reports for July and August. We also received two inflation reports, one of which was released during the blackout period. We also received the Quarterly Census of Employment and Wages (QCEW) which showed that our existing non-farm employment data may be overstated and will be revised downward in the future, which everyone is well aware of. We also saw anecdotal data, including the Beige Book. We collected all of this data, entered the blackout period, and thought about what actions to take. Our conclusion is that (pre-cut interest rates) this is the right thing to do for the U.S. economy and the people we serve, and we have made a decision accordingly.

To judge the future rate cuts, a good entry point is the Summary of Economic Projections (SEP). We will make decisions at each meeting based on newly received data, evolving economic outlook, and risk balance. Looking at the SEP, this is a process of recalibrating our policy stance, from the stance a year ago when inflation was high and unemployment was low, to a stance that is more in line with our current situation and expected achievement of goals. The recalibration process will proceed gradually. There is no sign in the SEP that the Committee is in a rush (“no rush”). The recalibration process will evolve over time.

Of course, the SEP is a forecast, a baseline forecast. As I mentioned in my speech, the actions we actually take will depend on the direction of economic developments. We can speed up, we can slow down, we can pause, as appropriate, but that’s what we have to consider. Again, I suggest that you simply consider this SEP as an evaluation of the committee’s thinking today, but each member’s thinking is based on assumptions that enable their respective forecasts to be realized.

AP: SEP shows that the federal fund Intrerest Rate will still be higher than the long-term neutral Intrerest Rate estimate by the end of next year. Does this reflect a restrictive Intrerest Rate level? Will this threaten the continued softening of the job market or does it mean that people believe that the short-term neutral Intrerest Rate is too high?

A: Under the baseline scenario, we expect to continue lifting restrictive policies and follow the economic response. Looking back, the policy stance we took in July 2023 was when the unemployment rate was 3.5% and the inflation rate was 4.2%. Today, the unemployment rate has risen to 4.2% and the inflation rate has dropped to slightly above 2%.

It is time to realign our policy stance to better align with progress towards more sustainable levels of inflation and employment. The balance of risks are now even. The direction of the adjustment process is towards a neutral interest rate, and our pace will depend on the situation in real time.

Reuters: Is it a dilemma for the first time since 2005 to have a commissioner cast a dissenting vote, 25 bps vs 50 bps? Will the pace set this time guide every meeting until next year?

Answer: The decision made by the committee has broad support.

We will make decisions at each meeting. The committee is not eager for quick success. We have made a good start, to be frank, this is indeed a manifestation of our confidence. We are confident that inflation will continue to decline to 2%. For me, from an economic and Risk Management perspective, the logic (of preemptive rate cut) is clear. We will prudently proceed step by step at each meeting and make decisions in real time.

The New York Times: SEP shows that once the unemployment rate climbs to 4.4%, it will remain at this level. However, historical experience indicates that once the unemployment rate rises for a period of time, it will not stop midway, but continue to climb. Why do you think the labor market will tend to stabilize?

Answer: The labor market is in good condition. The policy actions we are taking today are aimed at maintaining this state. The entire economy is the same. The U.S. economy is in good condition, steadily rising, and inflation is declining. The labor market is performing strongly. We hope to maintain this state. This is exactly what we are doing.