Federal Reserve Lowers Rates Amidst High Stocks and Home Prices

Overview

Since the last Federal Open Market Committee (FOMC) meeting on July 31st, there have been significant market changes. These include growth scares, the Jackson Hole Economic Symposium, varying data, and continuous commentary from the Federal Reserve. Notably, the market has largely convinced itself of the necessity for a 50 basis point cut, despite no immediate recession threat. Bonds and gold have significantly outperformed, while oil and the dollar have seen losses.

Stocks and Bonds

Stocks and bonds have diverged since the last FOMC meeting. Stocks remain unchanged, indicating no immediate recession threat, while bond yields have dropped 40-50 basis points, suggesting a possible recession.

US Macro Data

US macro data has dramatically exceeded expectations since the last FOMC meeting, which could be seen as an ideal time to cut rates.

Growth and Inflation Data

Both growth and inflation data have exceeded expectations. Despite this, the Federal Reserve appears to be moving towards a rate cut.

Rate-Cut Expectations

Expectations for a rate cut have increased significantly since the last FOMC meeting, with an additional 60 basis points of cuts expected by the end of 2025. Most of these cuts are expected to occur in 2024.

Rate Cut Decision

The focus of the meeting will not only be on the size of the cut, but also on future plans, particularly in light of the new DOTS (Summary of Economic Projections), which are expected to shift towards a more dovish stance. In the last refresh of the SEP, 4 FOMC members expected no rate cuts in 2024, 7 members expected 1 rate cut, and 8 members expected 2 rate cuts.

The Fed's Decision

The Federal Reserve has decided to lower the benchmark rate by 50 basis points to a target range of 4.75%-5.0%. This decision comes despite the economy's strong performance and just two months before the election. Governor Bowman was the only dissenting voice, favoring a 25 basis point rate cut. The Federal Reserve has stated that it is strongly committed to supporting maximum employment and a 2% inflation rate, and believes the risks to these goals are balanced. The Federal Reserve's projections have been adjusted to meet market expectations, with the 2024 projection lowered from 5.1% to 4.4%.

Full FOMC Statement

The full FOMC Statement is available for review.

Bottom Line

The Federal Reserve's decision to cut rates, despite strong economic indicators, is a significant move. The impact of this decision on the economy, particularly in the lead up to the election, will be closely watched. What are your thoughts on this decision? Do you agree with the Federal Reserve's actions? Share your thoughts with your friends and continue the discussion. Don't forget to sign up for the Daily Briefing, available every day at 6pm.