A Strong Move

The Fed relieves markets by lowering rates by 50bps

Summary: The Fed relieved markets last week by lowering rates by 50bps. Jerome Powell characterized it as a "strong move" and the first step towards getting back to a neutral policy rate. FOMC members expect rates to reach 3.4% by the end of next year, but Powell said that no one really knows what the neutral rate is today.

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Macro

The Fed lowered rates by 50bps
"We don’t think we’re behind. We do not think we’re—we think this is timely. But I think you can take this as a sign of our commitment not to get behind. So it’s a strong move." – Fed Chair Jerome Powell

FOMC members were signalling 25bps. What changed?
"Now, in terms of 25 versus 50, when I gave a speech 2 weeks ago today, the data we had after the July jobs report signaled to me that cutting, say, 25 would have been a good idea... this inflation data that we got during blackout pushed me in [the 50 bps] direction for the following reasons. Everybody was focused on core CPI, but what they weren't doing was looking at how that CPI report & the next day's PPI report, we're going to feed into total & core PCE inflation.... If you take that estimate and you add it to the last three months of data on core PCE, that four-month number annualizes to less than 1.8%... So, that is what put me back a bit to say, wow, inflation is softening much faster than I thought it was going to. And that is what put me over the edge to say, look, I think 50 is the right thing to do." – Fed Governor Christopher Waller

This is a step back to neutral
"So the balance of risks are now even and this is the beginning of that process. I mentioned the direction of which is toward a sense of neutral and we’ll move as fast or as slow as we think is appropriate in real-time." – Fed Chair Jerome Powell

FOMC members project that Fed Funds will be 3.4% by the end of 2025
"If the economy evolves as expected, the median participant projects that the appropriate level of the federal funds rate will be 4.4 percent at the end of this year and 3.4 percent at the end of 2025." – Fed Chair Jerome Powell

No one really knows what the neutral rate is but it's probably higher than it was
"It’s just a great question that we just—we can only speculate about. Intuitively, most—many, many people, anyway, would say we’re probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates. And it looked like the neutral was—might even be negative. So—and people were issuing debt at negative rates. It seems that’s so far away now. My own sense is that we’re not going back to that but, you know, honestly, we’re going to find out. But, you know, it feels—it feels, to me, that the neutral rate is probably significantly higher than it was back then. How high is it? I don’t—I just don’t think we know. Again, we only know it by its works." – Fed Chair Jerome Powell

They're not saying mission accomplished
"No. We’re not. So inflation—you know, what we say is we want inflation—the goal is to have inflation move down to 2 percent on a sustainable basis. And, you know, we’re not really—we’re close, but we’re not really at 2 percent. And I think we’re going to want to see it be, you know, around 2 percent, and close to 2 percent, for some time. But we’re certainly not doing—we’re not saying mission accomplished or anything like that. But I have to say, though, we’re encouraged by the progress that we have made." – Fed Chair Jerome Powell

But they don’t want to be behind the curve
"It's not about reacting to, or falling behind or anything like that. I do not believe we're behind." – Fed Governor Christopher Waller

There was one dissent
"Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5 percent, I see the risk that the Committee's larger policy action could be interpreted as a premature declaration of victory on our price stability mandate. We have not yet achieved our inflation goal." – Fed Governor Michelle Bowman

This is a different type of easing cycle
"And that if you think about it, it's the first time in 30 years where we're probably going into an easing cycle, which is kind of a classic one that for like maybe the economy is softening a bit, and the Federal Reserve just wants to get ahead of it as opposed to the last 30 years, it's been like from 5% to 0 in 24 hours because of bad stuff has happened whether it's 2008, '09, '11, COVID. So this is kind of a different type of easing cycle." – Bank of New York Mellon (BK 0.00%↑) CFO Dermot McDonogh

International