Fed starts rate-cut cycle with jumbo cut, but pace of cuts ahead likely slower

Investing.com — The Federal Reserve started the rate cutting cycle with a jumbo-sized rate cut on Wednesday, but economist believe a 50 basis point rate cut isn’t the new 25bps, expecting a more measure pace of cuts ahead.

Fed goes big as rate cut cycle begins

“The Fed did cut its policy rate by a bigger 50bp today, to between 4.75% and 5,00%, but the vote was not unanimous and the new rate projections point to smaller 25bp cuts at the remaining two FOMC meetings this year,” Capital Economics in a Wednesday note.

There was dissent from one Federal Open Market Committee member, Governor Michelle Bowman, who preferred to cut by 25 bps.

The big and bold rate cut to get the rate-cutting cycle underway, prompting many to speculate whether the pace of 50 basis points rate cut would be maintained for future meetings.

50bps cut the new 25bps?

Fed Chairman Jerome Powell, however, cooled hopes for a string of 50bps basis point rate cuts, saying the central bank would react to the incoming data by speeding up, slowing or pausing the pace of rate cuts if appropriate.

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

The remarks did little to persuade some on Wall Street that a 50bps cut was a ‘one and done’ deal for the year.

“The unemployment rate is likely to move higher and we maintain our call for 125bp of rate cuts this year with a subsequent 50bp cut in November and 25bp cut in December,” Economists at Citi said in a Wednesday note.

Others, however, believe the front-loading of rate cuts may support the Fed in taking a more measured approach to rate cuts.

“The FOMC may indeed slow the pace of rate cuts in coming meetings,” Wells Fargo said in Wednesday note, though reiterated its outlook for the end game on rates to reach neutral in one year’s time.

“[W]e look for the federal funds rate to be roughly 3.00%-3.25% or so by this time next year. We will formally update our meeting-by-meeting fed funds forecast in the coming days,” it added.

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

Economist at Citi also believe the Fed will target a terminal rate of 3 to 3.25%, but expect the remaining risk of larger front-loaded cuts.

Did a jumbo spook the market?

The move from the Fed to kick off the rate-cut cycle with a larger 50bps rate cut had triggered some concern that the size of cut signaled worries about the labor market and the economy.

Risk assets had a bumpy ride following the decision as the initial cheer and bid up in stocks following the decision quickly reversed, forcing stocks to snap their 7-day wining streak.

But Fed chairman Jerome Powell downplayed concerns about the risk of recession, or an economic downturn, suggesting that larger cut would help maintain the current “solid” pace of economic growth.

“I don’t see anything in the economy right now that suggests that the likelihood of a downturn is elevated,” Powell said.

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

Others appear to share the Fed’s chief thinking on decision to front-load rate cuts.

“The larger more front-loaded action is intended to curb the risk of a more serious increase in unemployment that might take on self-fulfilling recessionary dynamics,” Evercore ISI said in a Wednesday note.

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