Morning Market Brief September 19, 2024

Fed starts cutting interest rates

As widely expected, the US Federal Reserve Board (Fed) began lowering interest rates at its September meeting, which concluded yesterday. A softer economic environment and weak labour market warranted the rate cut from the Fed, which was its first since the onset of the pandemic in 2020. And it doesn’t appear that the Fed is done lowering interest rates.

• The Fed reduced its federal funds rate by 50 basis points (bps) to a target range of 4.75%–5.00%. The size of the rate cut was bigger than the 25 bps economists had expected, based on a survey by Bloomberg.
• This marked the Fed’s first rate cut since an emergency meeting in March 2020 as lockdown restrictions were being implemented in response to the pandemic.
• The Fed noted it is getting more confident that inflation will sustainably reach its 2% target. Fed officials have grown worried about the pullback in labour market conditions. The US central bank hopes this sizeable rate cut could help spur job growth and bring the unemployment rate down.
• The Fed also released its new outlook. It expects the annual personal consumption expenditure price index, its preferred inflation gauge, to slow to 2.3% this year and 2.1% in 2025. However, it downwardly revised its outlook for economic growth to 2.0% in 2024 from its earlier projection of 2.1%.
• Most Fed officials expect to lower interest rates by another 50 bps across its final two meetings of the year.

The lead-up to this moment has been building for a year. Recently, weak labour market conditions raised concerns about a potential recession, prompting the Fed to now begin lowering interest rates. The Bank of Canada will closely monitor upcoming actions by the Fed as it looks to set its own policy. Divergence in interest rates could have an impact on the Canadian dollar, which could impact trade activity between the two countries.

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