The US Federal Reserve’s decision to start its easing cycle with a 50bp rate cut is a means of insuring against the risk of falling behind the curve. Policymakers emphasised it is not a signal of intent to proceed with similar jumbo-sized future moves. The Fed’s determination to act in a timely manner should raise confidence about the probability of a soft landing for the US economy.
It was 50bp after all! On 18 September, after concluding the meeting of the Federal Open Markets Committee the Fed initiated its rate cutting cycle by taking the most dovish approach and cutting its key policy rate by 50bp to 4.75 – 5%.
The dot plot published in the wake of the meeting shows a committee split over another one or two cuts this year, before taking rates down 4-5 times next year.
During the press conference Chair Powell stressed that 50 is not going to be the baseline pace of cuts. Policymakers at the Fed are clearly concerned about the state of the labour market, with the majority of the committee seeing upside risks to their unemployment forecast. Until such time as the perceived risks around the labour market have been dispelled markets are likely to be inclined to anticipate a more rapid return to the neutral rate, which we evaluate as being around 3%.
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