The Fed cuts rates by 50 bp in the first easing since the pandemic hit

(Reuters) – The Federal Reserve cut interest rates by half a percentage point on Wednesday, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs amid growing unease with regarding health. of the labor market.

Policymakers see the Fed’s benchmark rate cutting another half percentage point by the end of this year, another full percentage point in 2025 and a final half percentage point in 2026 to end in a range of 2.75%-3.00%.

MARKET REACTION:

STOCKS: The S&P 500 rose 0.5% on the news

BONDS: The yield on the benchmark US 10-year note fell to 3.653%. 2-year note yield falls to 3.552%

FOREX: The dollar index fell 0.6% and the euro rose 0.58%. Both were almost flat before the announcement.

COMMENTS:

ADAM BUTTON, CHIEF FOREX ANALYST, FOREXLIVE, TORONTO

“Powell has been a dove throughout his tenure and he underlined that today. It is clear that Powell does not want to be behind the curve in a rate cut cycle and has decided to move preemptively. He was clear at Jackson Hole that he does not want to see any further deterioration in the labor market and I expect that to be his message in the press conference and that he will put another 50 basis point cut in play in November if jobs. the numbers soften even more.”

“Until recently, the market believed in the exceptionalism of the US dollar and the idea that US growth would outperform and rates would remain higher than elsewhere. It is now clear that the Fed will taper as fast or faster than other G10 central banks. So there’s a lot of air to get out of the US dollar if the Fed keeps up with it.”

“It’s a bold move and I think history will judge it as the right one. The bond market is saying the fight against inflation has been won and there is room to get rates down to 3% before the Fed stops and thinks.”

MATTHIAS SCHEIBER, GLOBAL HEAD OF PORTFOLIO MANAGEMENT AT ALLSPRING GLOBAL INVESTMENTS SYSTEMIC EDGE TEAM, LONDON.

“A cut of at least 25 basis points was widely expected based on recent progress in inflation and economic data and was generally hailed as a sign that yes, this long era of high interest rates will end in the latter. We think the Federal Reserve will continue to cut interest rates two more times this year to support economic growth – albeit in smaller steps of 25 basis points rather than 50 basis points.

“The key data we monitor is the labor market – the main challenge for the US economy moving forward. The U.S. unemployment rate, which has risen steadily in 2024, climbed to 4.1% in June. Forward growth indicators for the US manufacturing sector remain weak, and while the services sector is still growing, it is at a slower pace than at the start of the year.

The story continues

“Our base case is that the Fed will cut in each of its last two meetings this year to support the gradual slowdown in the US economy. We also expect the Fed to remain vigilant in monitoring inflation as the fight may not be over yet. Beyond 2024, the interest rate market is already pricing in more rate cuts through May 2025. However, it looks to us at the upper end – we expect growth to moderate, but we don’t anticipate an outright recession in the US .

“We continue to favor bonds, which benefit from moderating growth and moderating inflation, particularly internationally. We also continue to like equities – particularly the cheaper parts of the US equity market, excluding mega-cap US tech stocks. We expect equity gains to extend and believe any relief from the perception of looser monetary policy would likely support equity prices over the medium term.

“The upcoming US election and continued geopolitical uncertainty will keep markets more volatile, and we expect the Fed to take these developments into account.”

PETER CARDILLO, CHIEF MARKETS ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“I was expecting a 25 basis point cut. I thought they would go gradually, but they were more generous than I expected them to be. The big surprise here is that they indicated further cuts, possibly another 50 bps by the end of the year.

“The Fed’s move was conciliatory. I think their biggest fear is that the job market is getting too weak, and I think that’s why they did it.

“The initial reaction of the markets is positive. But what we’re seeing in the market right now could change over the next couple of days as investors start to worry about the economy.”

TOM HERRICK, CHIEF MARKET STRATEGIST, CARY STREET PARTNERS, RICHMOND VA

“The starting point is a very restrictive place. To drop 50 when you have both PCE and annualized CPI below target, there’s a ton of room to go down here, combined with what I’d call shaky, not terrifying, labor data. I’m making more progress than some immediately thought. That’s unusual for a 50 bp move. Typically when you see 50 on the downside, it’s 2007, it’s kind of falling apart, that’s not our situation right now. Remember two years ago we were getting to 75, and that was because they were so far behind. This is kind of the same, they’re a little behind, but really your starting point is so restrictive… There’s a lot of room to go down, so they’ve taken a big bite out of it to start.”

BRIAN JACOBSEN, CHIEF ECONOMIST, WEALTH MANAGEMENT ANNEX, MENOMONEE FALLS, WISCONSIN

“The Fed ended the break with a bang. It’s a strong signal that they cut 50 basis points and they expect another 50 basis points of cuts this year. This has been controversial. Powell has the lowest number of dissents for decisions since the 1950s. The last time there was dissent was in June 2022, when George wanted to slow the rise in the unemployment rate to 4.4% and inflation falling rapidly to the target.”

ERIC ORENSTEIN, SENIOR DIRECTOR, FITCH RATINGS, NEW YORK (in email)

“The Fed’s 50bp rate cut likely adds downward momentum to mortgage rates, which have already fallen significantly since May as Treasuries have risen. While not enough for a full refi boom, a 30-year average rate approaching 6% opens up a significant portion of the market for refinancing. Mortgage originators will benefit and are likely to find the hardest times behind them already.”

MICHELE RANERI, HEAD OF RESEARCH AND US CONSULTING AT TRANSUNION FROM CHICAGO (in email)

“Today’s cut in interest rates could allow consumers to see lower monthly payments. It may also allow many consumers to consider refinancing higher-interest debt into a lower-interest credit product, such as a personal loan or home equity loan.

In recent months, lenders have begun to exercise more discretion when it comes to who extends credit, favoring less risky borrowers. Whether this rate cut will see lenders once again offering credit to a larger segment of the consumer population remains to be seen, but it could help in that regard.”

(Compiled by the Global Finance & Markets Breaking News team)