Fed Day Hangover: Digesting the Latest Policy Decision and Accompanying Materials

Yesterday, in a somewhat surprising twist, the Fed opted to take a sizable jump out of the gate, but tempered the move with a somewhat hawkish statement.

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Taking a more aggressive approach in the latest policy pivot, the Committee opted to cut rates 50bps, lowering the upper bound of the target range from 5.50% to 5.00%. The Committee, furthermore, anticipates an additional 50bps of cuts by year-end and a further 100bps in cuts in 2025. The Committee also lowered the IORB and the discount rate 50bps to 4.90% and 5.00%, respectively.???

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Despite the decision for a more sizable rate cut out of the gate, however, in the details of the statement, the Committee took a somewhat positive assessment of conditions.?Noting growth continues to expand at a “solid” pace, policy makers also acknowledge a somewhat slower pace of hiring.?On the inflation front, the statement notes the Fed has gained greater “confidence” that inflation is moving towards the Committee’s target of 2%, although price pressures remain “elevated.”?As such, the Fed remains committed to supporting both?the goals of maximum employment?and stable prices with the risks from both sides coming “roughly” into balance.??

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The accompanying materials, furthermore, indicate expectations for an ongoing positive rate of growth with the Committee’s GDP forecast notably above the longer-run projection of 1.8% through at least 2027.?GDP, however, was revised down a tenth of a percentage point to 2.0% for the current year, while the outlook for the next two years was unchanged at 2.0%. Growth in 2027, a newly added forecast, is also expected to rise at a 2.0% pace.??

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Meanwhile, policy makers acknowledge the ongoing battle with price pressures, not anticipating inflation to subside and remain at 2% until 2026. The headline PCE projection was revised down from 2.6% to 2.3% for the current year and from 2.3% to 2.1% for next year. However, again the Committee does not expect the target level of inflation to be met until 2026, two years from now. Similarly, for the core PCE, the forecast was lowered from 2.8% to 2.6% for 2024 and from 2.3% to 2.2%, finally reaching 2% in 2026 and holding steady through 2027.??

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Additionally, the dot plot offered a welcome quantification of policy expectations with the majority of officials anticipating two more rate cuts by year-end, up from one indicated in the June release.?The division in expectations, however, is notable with nine officials anticipating less than the median forecast and one expecting three rate cuts by year-end.?Longer term, the Committee anticipates about 200bps in cuts by the end of 2027, taking policy to a proposed terminal level of 2.9%.

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Given the division in outlooks, the decision between a 25bp and 50bp cut today was likely a very close call with ultimately 11 voting in favor and one dissent. Governor Michelle Bowman dissented in favor of a lesser 25bp cut.?

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Bottom Line: Meeting the market’s expectations for a more rapid reversal in policy, the Committee opted to cut rates 50bps out of the gate. However, highlighting the still solid nature of the consumer and labor market conditions along with the need for still further improvement in prices, the statement struck a somewhat contrary, semi-hawkish tone in terms of underscoring the need for a patient stance and approach to policy going forward as the data continue to evolve.??

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As we’ve noted before, the risk with a larger 50bp cut is an inappropriate signal of the Fed’s intentions to rush back to neutral or below, as opposed to simply unwinding policy firming towards neutral. As such, at the press conference, Chair Powell appeared to be largely attempting to back pedal, insisting the Fed is in no “rush” to cut rates and furthermore, insisting that half-point cuts should not be seen as the new pace.?

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In the aftermath of the Fed announcement, the S&P 500 jumped more than 40 points. Following the presser, however, the S&P 500 gave up the gains, ending the day down a minimal 0.3%. Yields, meanwhile, pushed higher as investors began to question hopes for a more expedited pathway lower. The 10-year initially fell 2bps in the aftermath of the 50bps cut before ending the day up 6bps at 3.71%.

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This morning, the S&P 500 is up 1.8% at 5,717.87 and the 10-year is up 1bp at 3.72% as of 10:54 a.m. ET.

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Also yesterday, ahead of the Fed, housing starts jumped 9.6% in August, pulling the annual pace up from 1.24M to 1.36M, a four-month high. Starts were expected to rise 6.5%, according to the median forecast on Bloomberg. Single family starts jumped 15.8%, while multi-family starts fell 4.2%. Year-over-year, housing starts rose 3.9% in August, the largest annual gain in six months.

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Building permits, meanwhile, rose 4.9% in August, pulling the annual pace up from 1.41M to 1.48M, a five-month high. Building permits were expected to increase 1.0% in August, according to Bloomberg. Single family permits rose 2.8% and multi-family permits gained 9.2% in August. Year-over-year, building permits fell 6.5% in August, the seventh consecutive annual decline.

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In addition, yesterday, MBA mortgage applications rose 14.2% in the week ending September 13 following a 1.4% gain the week prior. The 30-year mortgage rate, meanwhile, dropped 14bps to 6.15%, a two-year low. This week’s decline to 6.15% marks the seventh consecutive weekly decline, the longest stretch since 2018-2019.

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This morning, the latest read on jobless claims reinforces Powell’s “solid” assessment in labor market conditions. Initial jobless claims fell 12k in the week ending September 14, the lowest since May. The four-week average declined from 231k to 228k. Continuing claims, or the total number of people claiming ongoing unemployment, fell from 1.84M to 1.83M.

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Also this morning, the Philly Fed Business Outlook Index rose from -7.0 to +1.7 in September, more than the expected rise to 0.0 and a two-month high. In the details of the report, prices paid rose ten points to 34.0, the highest reading since December 2022 and averaging 23.7 over the past six months, while prices received increased from 13.77 to 24.6 in September. Also, the number of employees rose from -5.7 to +10.7, a two-month high. On the other hand, new orders declined from +14.6 to -1.5 in September, the lowest reading in three months.

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Additionally this morning, the Leading Index fell 0.2% in August, slightly less than the 0.3% decrease expected and following a 0.6% drop the month prior.

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Finally, this morning, existing home sales fell 2.5%, more than expected, from 3.96m to a 3.86m unit pace in August, a ten-month low. Year-over-year, existing home sales fell 4.2% in August, down from the 2.2% gain last month and marking the 27th consecutive annual of decline. Due to a fall in sales, the months’ supply of existing homes ticked higher from 4.1 months to 4.2 months, averaging 4.1 months over the past three months. Additionally, from a price standpoint, the median cost of a previously owned home climbed 3.1% in August from a year earlier to $417k, down from $421k the month prior.????????

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Tomorrow, the economic calendar is empty.

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-Lindsey Piegza, Ph.D., Chief Economist