Week of September 16, 2024

Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation

The U.S. Federal Reserve finally did it. It cut rates for the first time in over four years. The central bank believes it has inflation under control and now wants to guide rates to tamer levels, to assure the healthy labor market remains intact. The cut was well telegraphed, but its size was the surprise. Over 95% of economists expected a 25-basis point (bp) cut, while the market was more of a tossup between 25 bps and 50 bps. The Fed delivered 50 bps.

At a press conference, Fed chair Jerome Powell was quick to qualify that with inflation contained but unemployment sneaking up, now was a good time for a preemptive cut. However, he cautioned that oversized cuts, like this current “recalibration,” wouldn’t be the norm.

The Fed’s outlook, its Summary of Economic Projections (SEP), suggests a series of 25-bp cuts for the remainder of this year and next. This would amount to about 150 bps of additional cuts. While the pace of rate normalization is important, the final resting place, or target Federal Funds Rate, is paramount. When Powell was asked where the Fed Funds rate would eventually settle, he responded, “We know it only by its works.”

Fortunately, to help get beyond the intrigue the SEP has provided an estimate of 2.9% for the long-term Fed Funds rate and has recently been nudging it up. For well over a decade, it was assumed to be in the 2–2.5% range. But a lot has changed. The demand for capital is intensifying as we reorder supply chains, shift to alternative energy and spend more on technological innovation. U.S. federal deficits also seem to be running higher on a persistent basis. All this suggests more activity, borrowing and higher rates.?

Sources: Bloomberg, Financial Times, 2024.

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