“This Was The Right Thing For The Economy.” Fed Reveals Big Rate Cut

Cheddar News

The Fed plans earlier rate cuts due to declining inflation and a softening job market, signaling a more aggressive approach than expected.

Transcript

00:00The Federal Reserve plans to reduce interest rates earlier than expected, driven by a quicker

00:05decline in inflation and a softening job market.

00:08This signals a more aggressive approach to rate cuts than policy makers had previously

00:13projected.

00:14And to break all of this down is Josh Hurt, senior economist at Vanguard.

00:18Thanks for being here, Josh.

00:19Thank you for having me.

00:20So, the Fed has cut interest rates by half a percentage point, an unusually large adjustment.

00:25And as mentioned, many are calling this aggressive.

00:28So can you break down this decision announced today and what it means?

00:31Sure.

00:32Yes.

00:33I mean, it was slightly larger than we were expecting.

00:35You know, we were favoring a 25 basis point approach, but, you know, it was a very close

00:39call and, frankly, we saw the merits of a slightly larger increase this time, too.

00:45And I think, as you mentioned, and as Chair Powell mentioned today, you have seen, you

00:49know, substantial progress both in inflation and the labor market has cooled more substantially

00:54since the last meeting.

00:55So we saw it as a very close call, but, yes, larger than expected.

00:59So we really want you to give us the good, the bad, the ugly.

01:02What are some of the key takeaways from the FOMC?

01:04And did anything really surprise you other than the 50 BPS?

01:07Right.

01:08So, I mean, there was really four things that, you know, we were looking for today in the

01:14report and the press conference afterwards.

01:17Clearly, 25 versus 50 basis points was a really key question on a lot of investors' minds.

01:22So that was one thing.

01:23We certainly got that settled.

01:24But we were also very focused on what the statement of economic projections was going

01:28to show.

01:29So with the longer run path, both for what the Federal Reserve's intentions were this

01:33year as well as next year, were going to show, and I think in that case broadly aligned with

01:39what we would have expected, a little bit more front-loading in terms of rate cuts projected

01:44more so this year, a little bit less this year.

01:47By this time next year, signaling roughly 200 basis points lower in the interest rate,

01:53the Fed Funds rate.

01:55The other thing we really were looking for was the statement.

01:57What were they going to signal in terms of how are they characterizing inflation, unemployment?

02:02What were some of the thresholds and the language used for what it would take for further interest

02:06rate cuts?

02:07Really, nothing surprising there.

02:09They signaled largely the same sort of tone in terms of the unemployment rate, signaling

02:16a little bit greater confidence in what has happened with inflation over the last few

02:20months.

02:21They maintained a very data-dependent tone in terms of what it will take to see future

02:27interest rate cuts going forward.

02:29The last thing was really just the market reaction.

02:32Really wanted to see how the market was processing both the statement of economic projections

02:37as well as the 50 basis point move.

02:39Overall, it seems that the market is really processing this quite well, not any large

02:43moves in some of your broad measures today so far.

02:47We talk about how this is a positive reaction in the markets, but can you talk about, maybe

02:51this question is better for Jerome Powell, but why do you think that it wasn't more clearly

02:56signaled ahead of time that it would be 50, and do you think this is possibly to catch

03:00investors and consumers off guard a bit?

03:03I don't think so.

03:04I think this was fairly well communicated.

03:08Markets were generally pricing in a coin flip leading up to this weekend.

03:12There was some pretty clear press communications late last week that I think really did set

03:18the tone for where we were.

03:20I think overall, certainly on our team and some of the debates that we've had, this was

03:26a very close call, and there were some merits on both sides.

03:30So far, I think the challenges have been handled really well.

03:34So of course, we are in an election year.

03:35The election is coming up in November, and a big talker for a lot of people is the economy.

03:40How might the Federal Reserve's larger interest rate cut impact the Biden administration as

03:44well as Vice President Kamala Harris' presidential campaign with this?

03:50I wouldn't expect this to have a real material impact.

03:52You've seen through time the last few months that the economy is still doing quite well

03:59in terms of the Fed's mandates.

04:01They are coming into better balance, and they're clearly taking action on that.

04:05The good news for the end consumer, for businesses, you started to see some of this rate move

04:09already filter through into market pricing.

04:13The 10-year has moved over the last few months.

04:16We're seeing that the 30-year mortgage rate has declined now below 6.5 percent.

04:22So you are seeing some of this already transmit through the economy, even before today.

04:27But I wouldn't expect this to have a substantial impact on campaigns.

04:31All right.

04:32We talk, of course, a lot about inflation and economy here on Cheddar.

04:35So in your opinion, they talk about the cooling of inflation happening right now.

04:39What is the biggest threat to our economy at the moment?

04:42Well, clearly all eyes are on the labor market.

04:45This has been something we've been very closely watching, that the unemployment rate has risen

04:51a decent bit from its bottom, around 3.5 percent rate early last year.

04:56So you have seen a rise there historically.

04:59Once the labor market starts to soften, it continues to do so.

05:02So this is really where we're focusing on in the moment.

05:05But I also wouldn't take eyes off of inflation.

05:08The Fed's communication today essentially signaled that inflation, the fight inflation

05:13is more or less over by projecting in their SEP some very positive numbers there.

05:22But it's something that's still elevated.

05:24And as we start to process the economy, I think it's really worth paying attention to

05:27that side of the mandate as well.

05:29And continuing to speak about the economy, prior to the pandemic more than four years

05:33ago, many people are hoping for a lot of the same things we saw maybe 2019 and before

05:38that.

05:39But with this current economy, the ebb and flow, is this simply the new normal, and we

05:43should get used to it at this point?

05:45Well, the economy is certainly very cyclical.

05:48I wouldn't expect volatility to dissipate.

05:52We've actually done a lot of work around this, around elections, and we find that it actually

05:56does tend to dissipate a little bit before and right after elections, as markets, as

06:02households, businesses really process new information, et cetera, around these events.

06:08But clearly, we would expect to see cyclicality be something that's maintained and be very

06:15watchful of that, especially as we move into the next year.

06:20Today's really just the beginning of the easing cycle.

06:22In our view, there still would be a very long way to go in terms of the Fed really calibrating

06:28things appropriately.

06:29So still a lot to really keep an eye on.

06:32And you also talked about keeping an eye on the job market.

06:34We know that the U.S. added 142,000 jobs in August, really falling short of expectations

06:39while the unemployment rate dropped to 4.2% as unemployment is expected to rise slightly.

06:46So you mentioned this, but I want you to talk more about it.

06:48How is the Fed balancing job growth and inflation?

06:51They're saying they see inflation cooling, but the job market is still a little strange

06:55out there at the moment.

06:56Right.

06:57Well, the key thing to remember is that policy does work itself through the economy with

07:02a time lag.

07:03So it does take time.

07:04So certainly the Fed is looking to be a bit forward-looking here.

07:07They're moving before inflation is actually at 2%, but has been making substantial progress

07:13and appears to be on a trajectory that would keep it close to 2% over the near term.

07:19And same thing with the labor market.

07:20We've definitely seen cooling.

07:23We've actually, on a three-month basis, job creation has cooled to roughly around 100,000.

07:31Certainly on the private side, we're just around at 100,000.

07:34So that's a number that I think definitely caught our eye.

07:37Just a few months ago, you were really creating jobs at around 200,000 pace.

07:41So you've seen some slowing there without question.

07:45And those are going to be the two areas to keep watching.

07:48And the Fed is trying to act in some ways preventatively, certainly from the labor market,

07:52from Chair Powell's comments, today's move is really meant to keep the labor market at

07:58a stable place.

08:00It's very uncertain where the actual sort of natural rate of unemployment might be at

08:05this moment.

08:07And so they're really trying to keep it in a range around the current levels, perhaps

08:12moderately higher.

08:14And Josh, lastly, some investors really might interpret any rate cuts as a signal to possibly

08:18take risks right now, anticipating further cuts in the future, as was discussed.

08:23So how does the Fed plan to manage some of these expectations to prevent market overreactions

08:28to its decision made today?

08:31That was a key area of focus for us.

08:34Would Chair Powell be able to really communicate, even with a larger move today, that there

08:39was still work to be done really on both sides of the mandate?

08:43I think so far his comments really did do a decent job of communicating that.

08:49But I think, and certainly the statement of economic projections really forecasting the

08:53path ahead for the Fed did a very good job of that.

08:57They don't appear to be moving too aggressively.

09:00But that's going to be something that they're going to have to keep on, because we know

09:04markets are forward-looking.

09:06They're really looking for any signs to begin easing conditions even more substantially

09:12than was perhaps signaled today.

09:14So I'd say there's still work to do on that.

09:15But I think so far, from the initial comments in the press conference, that that message

09:21has been communicated pretty well.

09:23All right.

09:24We have to keep an eye on what happens next.

09:25Josh Hirt, senior economist at Vanguard, thanks for joining us here on Cheddar.

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