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Fed Slashes Rates by 0.5%, Front-Loading Cuts

The Federal Reserve made a significant move wednesday by cutting its benchmark interest rate by half a percentage point, setting a new target range of 4.75% to 5%. This marks the beginning of a new policy phase aimed at addressing a slowing U.S. labor market and persistently high inflation. The decision to front-load rate cuts reflects the Fed’s proactive approach to preventing further economic weakening.

Market expectations fluctuated between a quarter- and half-point reduction leading up to the meeting, but the larger cut demonstrates the Fed’s urgency to act. The median forecast in the updated "dot plot" projects a federal-funds rate of 4.25% to 4.5% by the end of 2024, slightly less easing than the market had anticipated.

Fed

Market Response to the Rate Cut

Despite the sizable rate reduction, the market reaction was relatively muted. The ‌$S&P 500(.SPX)$‌ and ‌$NASDAQ(.IXIC)$‌ fell 0.3%, and the ‌$DJIA(.DJI)$‌ slipped by 0.2%, while bond yields rose modestly. Futures markets still anticipate further cuts, with the greatest odds pointing to a fed-funds rate between 4.0% and 4.25% by the end of the year, implying additional cuts at the November and December meetings.

Powell’s Optimism: A Bullish Outlook

In a press conference following the announcement, Federal Reserve Chairman Jerome Powell took a bullish stance on the economy, expressing confidence in the Fed’s ability to manage inflation while keeping unemployment in check. Powell reassured the market that despite concerns over the labor market, the U.S. economy remains resilient. Fed officials see real GDP growing at a 2% annual rate through 2027, with unemployment peaking at just 4.4%.

Powell emphasized that the rate cut was not an act of panic but a strategic "adjustment" to keep the economy on track. By moving decisively now, the Fed aims to prevent the recent softening in the labor market from escalating.

Powell- FT

Path to Neutral Rates by 2026

Looking ahead, the Fed projects continued rate reductions, with another half-point cut by the end of 2024 and further cuts in 2025 and 2026. By mid-2026, the fed-funds rate is expected to reach its neutral level, just below 3%. Powell’s approach indicates confidence that the Fed can lower inflation while avoiding significant disruptions in the labor market, potentially achieving a rare soft landing for the economy.

Managing Inflation While Maintaining Growth

The Fed’s current strategy reflects a shift away from its previous “data-dependent” approach. With inflation trending downward and growth holding steady, the central bank now has room to move rates toward a neutral setting without overstimulating the economy. This approach, described as a form of risk management, allows the Fed to address labor market concerns while maintaining a healthy economic outlook.

Powell's confidence in the Fed's ability to manage inflation and keep the economy stable, combined with a gradual easing of interest rates, signals a positive outlook for markets, consumers, and the broader economy. The coming months will be critical as the Fed navigates its path to neutral rates, aiming to sustain growth and prevent further labor market deterioration.

Inflation-Pitcs.in

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This report is for informational purposes only and does not constitute financial advice. Market conditions can change rapidly, and past performance is not indicative of future results. Investors should consult a financial advisor before making investment decisions.

@TigerStars @CaptainTiger @Tiger_SG

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