Federal Reserve Initiates Rate-Cutting Cycle

Investing.com reports that the Federal Reserve started its rate-cutting cycle in September with a significant 50 basis-point reduction in policy rates. This marked the first rate cut in the US since 2020.

According to Wells Fargo, the magnitude of the cut, along with comments from Fed Chair Jerome Powell, indicated concerns about the job market's condition and reduced anxiety about inflation.

Powell stated during the press conference that the labor market is strong, and the Fed's decision aims to maintain its health.

Members of the Federal Open Market Committee (FOMC) predict a slight rise in unemployment to 4.4% in 2024 and 2025, with GDP growth projected at 2.0% annually for the same period. Wells Fargo notes that this reflects a cooling labor market, but one that isn't significantly declining.

The FOMC members also foresee continued inflation decline. They suggest that while rate cuts are likely, the extent of these cuts, particularly in 2025, remains uncertain.

Interestingly, the Fed's updated projections contrast with market expectations, which are pricing in 125 bps of rate cuts for both 2024 and 2025. This outlook is more aggressive than the Fed's expected 100 bps cuts for each year.

With most FOMC members anticipating 100 bps or fewer cuts in 2024, strategists warn of potential market disappointment. They argue that market pricing implies a requirement for one more aggressive 50 bps cut in 2024 rather than two moderate 25 bps cuts, which they believe is unsupported by the current job market dynamics. Powell's remarks further align with this view.

Looking ahead, strategists express caution regarding market expectations for the Fed’s rate-cutting cycle, deeming them “too optimistic.” They project that 200 bps of cuts by 2025 would necessitate a significantly worse economic environment than currently forecasted by either themselves or the Fed.

Wells Fargo speculates that if the economy experiences a gradual slowdown followed by recovery in the latter half of 2025, the September cut might be the only 50 bps reduction in this cycle. Additionally, they believe inflation could spike again by mid-2025, which would thwart the Fed’s projected rate cuts.

In a more practical scenario, Wells Fargo anticipates an additional 50 bps cut in 2024 and 75 bps in 2025.