The Federal Reserve has cut interest rates by 25 basis points, but the outlook for future moves remains uncertain. Markets are reacting cautiously as investors weigh conflicting signals from Fed Chair Jerome Powell and economic data. Will this be the start of a rate-cutting cycle, or just a one-time adjustment? Watch our full breakdown for insights into what this means for stocks, bonds, and the economy.
00:0025 basis point rate cut, the Federal Reserve lowering their benchmark interest rate by a quarter percentage point to a new range of four to four and a quarter percent and signaling two more rate cuts this year. The decision was not unanimous. Newly minted Fed Governor Stephen Myron dissented, preferring to cut by 50 basis points instead of 25. As for the breakdown for rate projections this year, nine officials seeing three rate cuts in total this year.
00:29Six officials seeing one cut, one saw no cuts and one saw six cuts, presumably Stephen Myron there. For next year, the median is for just one more rate cut. Now these rate projections come as Fed officials upgraded their outlook for economic growth but held their outlooks for both inflation and the unemployment rate.
00:51GDP now seen increasing to 1.6 percent versus the 1.4 percent projection back in June and they see the economy growing at 1.8 percent next year.
01:04Inflation expected to remain at 3.1 percent this year before coming back down to 2.6 percent next year. The unemployment rate seen at 4.5 percent, which is the same estimate from back in June and falling a tenth of a percent next year to 4.4 percent.
01:22Now officials acknowledge the weakness that we've seen in the labor market in their policy statement, saying that, quote, job gains have slowed and that the unemployment rate has edged up but remains low.
01:34That was a downgrade from back in July when they had characterized the job market as, quote, solid.
01:39One other change, they said, in considering additional adjustments to the target rate for the Fed funds rate as opposed to the extent and timing of additional adjustments, the committee is carefully going to assess incoming data, the evolving outlook, and the balance of risks.
01:56So, guys, clearly the Fed here are concerned about weakness in the job market.
02:00Here with more on the Fed's rate decision now, we've got Gregory Daco, EY Chief Economist, and Mira Pandit, Global Market Strategist at J.P. Morgan Asset Management.
02:08Welcome to you both.
02:09Greg, as the resident economist on the panel, my friend, we will start with you.
02:13Just big picture your reaction to the Fed decision.
02:16Greg, what do you make of it?
02:17Was it the right decision?
02:18Well, I think it was definitely the right decision.
02:20I've been arguing for a while now that the economy is showing signs of softening.
02:23It's not falling off a cliff, but we are seeing the labor market show signs of softening.
02:27We are seeing consumers being more judicious, even though there are mixed signals in terms of the labor market, in terms of how people are spending, in terms of inflation.
02:35There is increased evidence that these tariffs, these immigration restrictions, and the policy uncertainty are restricting private sector activity.
02:42And I think the Fed is right to proceed with a risk management rate cut, acknowledging the slowdown in the labor market, acknowledging as well that inflation is still above its 2% mandate,
02:53and acknowledging that risks to the labor market are tilted to the downside.
02:57But I think one very interesting dimension here is that we're seeing this growing split in the dot plot of median rate height expectations.
03:04You have one rate expectation, which is below 3% for the end of the year.
03:09That's likely Stephen Myran's estimate.
03:12But most of the view is still that we're going to see two to three rate cuts over the course of 2025, but less easing, interestingly enough, in 2026.
03:22So how does this comport with what we were expecting in terms of what the market was expecting?
03:27And we are seeing a little bit of a lift to stocks, for example, but not a huge move upward.
03:32That could change during the press conference.
03:34But what do you make of the dots and the implications?
03:3725 basis points was largely expected for this meeting.
03:41Look, if the Fed had gone 50, I think the market would have been a little bit more prepared for it, given what happened last year.
03:46But I would say overall, we have three conversations in any of these cycles, whether it's hiking or cutting.
03:51It is first the direction of travel.
03:52We know cutting is the direction we're going in.
03:55The second is around the pace.
03:56And then the third is around the end point.
03:58Where do we stop?
03:59Where is the terminal rate?
04:00And right now we're in that pacing conversation.
04:02So it is interesting to see that the Fed does see a little bit more cutting this year.
04:06I think that, again, that is broadly expected.
04:08But next year is such a big question mark.
04:11And it seems like what the Fed has phased out here is we want to be attentive to the risks in the labor market.
04:16When you see the massive slowdown in labor market momentum that we have seen over the last couple of months, that's an important consideration.
04:24But as we head into next year, remember that consumers will get some pretty big refunds when it comes to taxes.
04:29That will likely lift consumption and therefore growth.
04:32Corporations will also get some tax corporate sweeteners, so to speak, not necessarily cuts.
04:38But those provisions may lift profitability and lift CapEx.
04:42So we could be in a situation next year where growth has sped up, where inflation has either sped up or stayed elevated.
04:50We actually don't see it peaking until June of next year.
04:53And so that would imply that all of a sudden the Fed is go, go, go, and then stop a little bit into next year.
04:59And I think that's reflected in the dots for next year.
05:02Greg, can I get your take on the broader economy, Greg?
05:05It is noteworthy to me how I have very smart economists on the show, and I have such a range of opinions about it.
05:12I mean, there are some who flag the concerns, and you highlighted some.
05:15There are others, Greg, though, I have on who are much more confident.
05:19And I guess, you know, if I was to sum it up, they'll talk, Greg, tax cuts and rate cuts, and they'll talk deregulation and the AI boom.
05:28And they'll say those are all tailwinds.
05:31Agree with that?
05:32Disagree with that?
05:33Give me your take.
05:34Well, I think the one thing I'll agree on is the fact that there is very little confidence in forecasts right now.
05:39Because there are so many headwinds and tailwinds that are affecting the economy, the signals are conflicting.
05:44Whether you look at retail sales in nominal terms over the course of the past month, you would argue for a strong economy, a strong consumer spending.
05:52You peel back the inflation contribution to that, and you see that volumes for furniture, for building equipment, for groceries are falling back.
06:00So we're seeing essentially this consumer that's supporting this tension where prices are rising, labor conditions are softening.
06:07They're not falling off a cliff, but they're softening.
06:10And businesses are caught in a pinch because they're hesitant between passing on these higher costs to a consumer that is increasingly sensitive or holding on to them but seeing essentially a compression in margins.
06:22And that's really the tradeoff that a lot of businesses are facing.
06:25This is an uncomfortable environment.
06:27It's a delicate balance.
06:28I hear a lot of people talk about the no-hire, no-fire labor market.
06:33That is not a sustainable balance.
06:35At one point, you're either going to see more employment or less or more firings.
06:39It's not going to be this comfortable balance when it comes to this labor market.
06:43Mira, I want to bring you here as well.
06:44I mean, I do want to talk politics here, Mira, in the sense that, listen, there's people who are voting here who are making lists as maybe the next Fed chair.
06:54They're in the running.
06:54How, if at all, Mira, do you think that is impacting decision-making?
06:59Mira, where I will defend Fed independence here is let's forget about everything that's happened this year and think about the dot plot and the summary of economic projections that we saw in December of last year.
07:11And in December of last year, the Fed was looking for two potential rate cuts in 2025.
07:16And what we are likely to see is two rate cuts or potentially three in 2025.
07:21So, it's really in line with what they were saying months ago in that there was an anticipation that the economy would soften relative to the last few years.
07:29Now, tariffs certainly threw them for a loop.
07:31And they have acknowledged that, look, if it weren't for tariffs and if it weren't for potential higher inflation coming along the way, that they would already be cutting.
07:39And typically, the Fed actually does tend to cut before they get all the way down to their inflation target.
07:45You know, with three meetings and now two meetings left in the year, it's not unrealistic and unreasonable what they have chosen to do, especially when it's supported by the weaker labor market data that we've seen.
07:58So, it is a committee.
07:59You do see with the dissents, there could have been a lot more dissents than we actually ended up seeing.
08:03So, that consensus building still does appear to be at play underneath the surface.
08:09With one exception.
08:10Sure.
08:10Right.
08:11So, I want to talk about the exception a little bit.
08:13Stephen Meyron saying we should have cut a half point.
08:16Mm-hmm.
08:17Is there a legitimate argument to be made for having cut a half point today?
08:21Or is he, does this emphasize that he is exclusively a mouthpiece of this administration that very clearly wants a cut for its own purposes?
08:30I mean, I think you've heard me argue the rationale that we're going to see tariffs affect inflation, affect prices, but it's likely to be a one-time hit because the labor market is softer than it was back in 21, 22, where you had this wage inflation spiral.
08:44You're not going to get that in this environment.
08:46Wage growth is actually decelerating.
08:48Employers are not looking to raise wages.
08:50They're looking to cut costs and cut employment.
08:52So, you're not necessarily seeing that potential for a second-round effect on the wage front.
08:57So, I think the pass-through from tariffs is likely to be a one-time shock.
09:00We still have some disinflationary currents in the housing segment, for instance.
09:04So, there is room for the Fed to be easing, to be buffering this negative shock to the labor market.
09:09I would have argued that you can actually ease monetary policy and bring it back closer to neutral over the near future.
09:15So, I wouldn't have been opposed to a 50 basis point rate cut.
09:18But what I found surprising is that Governor Waller and Governor Baumann did not dissent.
09:23They were in favor of this 25 basis point risk management rate cut.
09:27This was in the statement.
09:28Essentially, in light of the growing downside risk to the labor market, we're going to be cutting 25 basis points.
09:34And we're going to keep adjusting monetary policy as needed, as the data shows and as the data reveals how strong or how weak the economy is.
09:42And that's, I think, where the market pricing is perhaps getting a little bit ahead of itself.
09:46We're not necessarily going to be in an environment where the Fed is going to be cutting at every single meeting, regardless of the economy.
09:53A lot of attention will be paid to inflation and to the next payroll report.
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