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-Scott

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The Fed Made a Strong Move

The Fed officially lowered interest rates last week by 50bps. Going into their meeting it wasn’t clear whether the Fed would lower interest rates by 25 or 50 bps. They chose to go the more aggressive route.

While Powell called this a “strong move,” the Fed does not appear to see this as a move towards a stimulative stance. Powell said that this is not intended to be a declaration of victory over inflation. Instead, the change was framed as the first step towards bringing policy to a neutral level.

This, of course, begs the question of what the neutral rate is. In the SEP that was published alongside the policy decision, members of the FOMC signaled that they thought 3.4% would be an appropriate Fed Funds rate by the end of 2025 and that in the longer run, they saw the rate trending towards 2.9%. This may still be uncomfortably high for markets that got used to a zero-interest rate policy.