Fed Kicks Off Rate Cut Cycle With Jumbo Cuts, But Pace of Cuts Likely to Slower By Investing.com

Investing.com — The Federal Reserve kicked off the interest rate cut cycle on Wednesday with a jumbo-sized rate cut, but economists believe a 50 basis point cut is not the new 25bp, expecting a pace of cuts wider.

Fed Goes Big as Rate Cut Cycle Begins

“The Fed cut its policy rate by 50bp today to between 4.75% and 5.00%, but the vote was not unanimous and new rate forecasts point to cuts of less than 25bp at the next two meetings of this year’s FOMC”. Capital Economics in a note on Wednesday.

A member of the Federal Open Market Committee disagreed, Governor Michelle Bowman, who preferred to cut by 25 bps.

Big and bold rate cut to kick off the rate cut cycle, prompting many to speculate whether the 50 basis point rate cut pace will be maintained for future meetings.

50 bps cut the new 25 bps?

However, Fed Chairman Jerome Powell cooled hopes for a series of 50-basis-point rate cuts, saying the central bank would react to incoming data by accelerating, slowing or pausing the pace of rate cuts if necessary .

“I don’t think anybody should look at this and say this is the new pace,” Powell said in remarks during the FOMC’s September press conference that followed the monetary policy decision.

The remarks did not convince some on Wall Street that a 50 basis point cut was a “one and done” deal for the year.

“The unemployment rate is likely to rise and we maintain our call for 125bp rate cuts this year, with a further 50bp cut in November and a 25bp cut in December,” Citi economists said in -a note from Wednesday.

Others, however, believe that front-loading rate cuts may support the Fed to take a more measured approach to interest rate cuts.

“The FOMC may indeed slow the pace of rate cuts in future meetings,” Wells Fargo said in a note Wednesday, although it reiterated its outlook for the endgame to reach neutral a year from now.

“We expect the federal funds rate to be around 3.00%-3.25% or so by this time next year. We will formally update the food fund forecasts met with the meeting in the coming days,” he added.

Economists at Capital Economics agree, saying they “still expect the federal funds rate to fall between 3.00% and 3.25% in mid-2025.”

The Citi economist also believes the Fed will target a terminal rate of 3 to 3.25 percent, but expects the remaining risk of further cuts anticipated.

Did a jumbo spook the market?

The Fed’s move to start the rate-cutting cycle with a larger 50 bps rate cut sparked some concern that the size of the cut signaled concerns about the labor market and the economy.

But Fed Chairman Jerome Powell downplayed concerns about the risk of a recession or recession, suggesting that more tapering would help maintain the current “solid” pace of economic growth.

“I don’t see anything in the economy right now that suggests a recession is more likely,” Powell said.

“(Economic) growth at a solid rate, inflation coming down, you see a labor market that’s still at very solid levels, so I don’t really see that (recession risk) right now.”

Others appear to share the Fed’s main thinking on the decision to anticipate cutting rates.

“The broader and more frontal action is aimed at reducing the risk of a more serious increase in unemployment, which could take on a self-fulfilling recessionary dynamic,” Evercore ISI said in a note on Wednesday.