September FOMC Highlights: Late to party but with a bang!

September FOMC Highlights: Late to party but with a bang!

The FOMC has delivered its first rate cut since 2020, bringing the rates down from levels last seen in 2007.

The FOMC started the rate cut cycle with a 50-bps reduction. Typically, markets are well-aligned with the expected outcome of the FOMC rate decision. However, this time, after a very long period, there was greater uncertainty, with markets expecting an implied rate reduction of close to 41 bps, slightly tilted towards a 50-bps cut. This uncertainty arose due to comments made by a Fed Whisperer and former Fed officials during the blackout period. The final decision was made with an 11-1 vote, with Governor Bowman dissenting against the 50-bps cut. Bowman’s dissent, while notable, wasn’t entirely unexpected, which wouldn’t matter as she has been a hawkish voice. However, it’s worth mentioning that this was the first time a Fed Governor has dissented since 2005.

The changes in the FOMC statement highlighted a shift in focus toward the labor market, which is now seen as a key driver of future decisions. Inflation has been moving in the Fed’s favor, which could lead to further rate cuts soon as inflationary pressures ease.

Below are the highlighted changes in the FOMC Statement:


Along with the FOMC statement, we also received the SEPs (Summary of Economic Projections), which indicated an additional 50 bps rate cuts this year. However, this projection came with a small majority because if just one member had raised their rate forecast (the so-called dots), we could have just seen 1 cumulative cut across the next 2 meetings. This could have sparked more hawkish signals, although the markets would likely not have priced in such expectations and reacted more to strong labor data than to the Fed’s decision alone.

Looking ahead, the Fed signaled 4 cuts in 2025 and 2 cuts in 2026. Additionally, the longer-term rate projections (the “dots”) have been revised quite a few times this year, indicating The Fed’s confidence that the neutral rate has risen from pre-pandemic levels. Currently, the longer-term rate is projected at 2.9%, reflecting confidence that the rate will remain higher than in previous cycles (for a visual reference of these projections, refer to the image below).

Regarding other projections, the unemployment rate is expected to be 4.4% for both 2024 and 2025, whereas Core PCE inflation is projected at 2.6% and 2.2% for 2024 and 2025, respectively. A key highlight from the projections is the increased uncertainty and upside risks surrounding the unemployment rate compared to the June projections (which have been highlighted in the image below).


This heightened risk concerning unemployment has outpaced the corresponding risk tied to Core PCE inflation, which is evident in the attached image. The below 2 images illustrate who sees upside risk to the unemployment rate (12 members), whereas Core PCE (3 members) and the latter image show the difference between these two series across the last few years. This difference is approaching levels last seen in 2012/13 and 2019/2020. This indicates that the labor market is the central topic for the Fed, barring any upside inflation bump in the next few months.

Fed Chair Jerome Powell’s tone during the press conference was optimistic, signaling that this was a hawkish 50 bps cut rather than a dovish one while keeping all options open. If the Fed had appeared overly concerned, it might have raised questions like: “What is it that the Fed knows that we don’t know?” “We are recalibrating our policy stance” seemed to be the key statement from the press conference.

Powell also kept all options open by mentioning that they could go quicker, slower, or pause depending on the data and situation. He stressed that no one at the FOMC felt rushed despite cutting rates by 50 bps. On further policy moves, Powell clearly communicated that markets shouldn’t expect 50 bps to be the new pace going forward.

Overall, Powell tried to assure everyone that the 50-bps move was not a signal of panic but rather an effort to stay ahead of or aligned with the curve, as they might have cut rates in the July Meeting if they had the jobs data at the time.

Powell also discussed the retail sales data along with 2Q GDP data, indicating that the economy is growing at a solid pace. He also noted that there are no signs of rising layoffs based on feedback from their business contacts. Governor Waller mentioned immigration as a factor that has allowed the unemployment rate to rise slightly, but from now on, lower job vacancies could also put pressure on the unemployment rate.

Key Takeaways

The FOMC wants to be ahead of the curve or at least not fall behind when other central banks have already started cutting rates. They would not like the labor market to deteriorate. As Powell put it: “The time to support the labor market is when it’s strong.” While the Fed is aiming for a soft landing, there are risks. Falling too far behind could make a hard landing more likely, with the unemployment rate playing a pivotal role in determining the outcome.

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