US Fed Rate Cut: FOMC Plots Another Half-Point Reduction This Year | As It Happened

Federal Reserve Chairman Jerome Powell will speak on the FOMC's monetary policy decision.

Federal Reserve officials have raised their expected unemployment rate for this year to 4.4%, up from the June projection of 4%.

At the same time, they revised the inflation outlook downward to 2.3%, compared to 2.6% previously. For core inflation, the committee lowered its projection to 2.6%, a decrease of 0.2 percentage points from June.

Moreover, the forecast for the US GDP growth this year has been reduced to 2%, from the previous 2.1%.

• Fed remains squarely focused on dual mandate goals.

• Labour market has cooled from formerly overheated state.

• Fed committed to maintaining economy's strength.

• Fed can maintain labour strength with policy adjustment.

• Labour market conditions have continued to cool.

• Unemployment rate has moved up but remains low.

• Labour market not a source of elevated inflation pressures.

• Long-term inflation expectations appear well-anchored.

• Acutely aware high inflation poses significant hardship.

• Upside inflation risks have diminished, downside risks to employment have increased.

• US economy is in a good place; rate cut is to keep it there.

• We might well have cut in July if policymakers had known the July employment report.

• S&P 500 up 0.4%

• Dow Jones Industrial Average up 0.2%

• Nasdaq up 0.2%

Fed chief Jerome Powell said the era of near-zero interest rate is long gone.

Powell said migration from America's southern border, a contentious political issue, has increased while hiring has cooled, leading to higher number of job-seekers.

Credit derivatives spreads edged tighter on Wednesday after the Federal Reserve cut interest rates for the first time in over four years, lowering them by a half percentage point, Bloomberg reported quoting Eric Williams, head of capital structure and senior portfolio manager at Northern Trust Asset Management.

“Credit markets should react positively to the Fed’s decision to take a more proactive stance to defend the state of the US consumer. Capital markets and high yield valuations are likely to be reinforced by this decisive action going into year end," Williams said.

Read more here.

Powell said the 50 basis point cut should not be seen as the new pace and the US Fed will continue to monitor fresh data for future decisions. The Fed’s two remaining meetings for the year are scheduled on Nov. 6-7 and Dec. 17-18.

The Fed Chair said there was "broad support" for the 50 basis point rate cut. One out of 12 FOMC members voted for a 25 basis point cut.

The Fed’s tightening campaign has “paid dividends” in the form of inflation coming down, Powell said. Now, the risks to the goals of stable prices and full employment are “roughly in balance.”

Jerome Powell said the US Federal Reserve will not follow a set course and evaluate data to make its future decisions.

"Our recalibrated policy stance will help maintain the strength of our economy and the labour market and continue to enable further progress on inflation as we begin the process of moving to a more neutral stance. We are not in a pre-set course."

Powell says the Fed has growing confidence that strength in the job market can be maintained as it adjusts its policy rate. He repeats his assessment that the job market is not imparting inflationary pressure on the economy.

The American Depository Receipts of Infosys Ltd. declined 1.9% and Wipro Ltd. by 1.1%.

The US Federal Reserve's interest rate reductions have significant implications for Indian markets, particularly for IT companies that heavily rely on the US market for their revenue. The IT sector has consistently shown sensitivity to broader US economic trends and monetary policy decisions.

The benchmark 10-year Treasury bond was flat at 3.65%.

Spot gold prices hit record high of $2,595.7 an ounce, an increase of 1%.

• Median official expected to lower rates by 1 percentage point by year-end.

• This implies two more quarter-point cuts or one larger, half-point cut.

• Nine of 19 officials penciled in 75 bps of cuts or less.

• Median rate forecast for 2025 falls to 3.4% from 4.1% in June.

• This implies 4 additional quarter-point moves next year.

The US Federal Reserve sees interest rate at 4.4% at end of 2024 and 3.4% in 2025. It said risks to employment and inflation goals are in balance.

The decision to cut interest rates by the US Federal Reserve is the first since the pandemic in 2020, when the rates were brought to near-zero to deal with the economic shock.

The Dow Jones Industrial Average gained 0.9%, or 375.8 points to reach an all time high of 41,981.97. The Nasdaq soared 1.16% intraday to 17,832.7.

"In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities," the Fed said.

The FOMC's decision on the interest rate was no unanimous. Eleven members voted for 50 bps cut, while Michelle W. Bowman preferred to lower the target range for the federal funds rate by 25 bps at this meeting.

"Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated," the FOMC statement said.

The Federal Open Market Committee reduced the interest rate by 50 basis points to 4.75% to 5% target.

The Federal Reserve's rate cut followed eight consecutive meetings where the rate remained unchanged. Last year, the Fed raised the benchmark rate by 25 basis points to its highest level in 22 years.

The FOMC is due to announce its decision on the interest rate in 10 minutes.

The US Dollar weakened by 0.4% against the Japanese Yen. The yen was at 141.86 per dollar at 11:00 p.m. India time.

• S&P 500 trades 0.1% higher

• Nasdaq 100 up 0.08%

• Dow Jones Industrial Average up 0.4%

• 10-year treasury yield rises 3 basis points to 3.68%

• Bloomberg Dollar Spot Index flat at 100.87

The US Federal Reserve will announce its decision on the interest rate in an hour. Global markets and policymakers are on edge.

Bond traders are favoring bets the Federal Reserve will kick off its interest-rate cutting cycle with a half-point move this week as debate rages on over whether officials can pull off a rare soft landing, Bloomberg reported.

“The decision is essentially a coin flip,” Blerina Uruci, chief US economist at T. Rowe Price, told Bloomberg Television. “It is possible we get a 50-basis-point cut tomorrow,” and the Fed’s summary of economic projections “will probably show the dot plot has 100 basis points worth of cuts for the year as a whole.”

Much of the expected Fed rate cuts have already been factored in by the markets and investors, according to Gargi Pal Chaudhuri, managing director, chief investment and portfolio strategist, Americas at BlackRock.

"The market is pricing in that rates will come down to the 2.75% mark fairly quickly," she said, pointing out that by 2026, markets expect the Federal Reserve's interest rates to settle near this level.

This aligns with previous rate-cut cycles, such as the 2019 reduction when rates were in the mid-2% range. This was when the economy was doing well right before the Covid-induced cuts. 

But the prospect of rates dropping significantly below 2% and the likelihood of rates returning to pre-pandemic levels is slim, she said.

Fed funds futures traders on Wednesday priced in a 55% probability of a 50 basis-point cut, down from 64% on Tuesday. They saw a 45% probability of a 25 basis-point cut, according to the CME FedWatch Tool, compared to 36% a day prior.

The international benchmark Brent crude slipped 0.75% to $73.12 per barrel at 9:34 p.m. India time. West Texas Intermediate, the US benchmark, was was also down 0.7% at $69.47.

• S&P 500 trades 0.1% lower

• Nasdaq 100 down 0.24%

• Dow Jones Industrial Average down 0.1%

• 10-year treasury yield rises 4 basis points to 3.69%

• Bloomberg Dollar Spot Index flat

The Fed’s dot plot is a chart published quarterly that shows where each member of the Fed’s policymaking committee expects interest rates to be over the next few years, according to Fidelity Investments. Currently, the dot plot suggests the fed funds rate may begin declining late this year before leveling off in 2026.

The Fed dot plot is important to see how deep the Fed sees the cutting cycle, Dhiraj Nim, economist and FX strategist at ANZ said. The market is aggressively positioned on rate cuts and the Fed's commentary on growth and the labour market will be scanned by recession watchers, Nim explained.

The Fed cutting is positive in terms of flows but a lot is already priced in, Nim added. Only a dovish surprise will spur significantly more inflows. If the narrative remains of a soft landing, then it should be positive for inflows and the rupee, Rakshit said, adding that a recessionary scenario will be negative for inflows and the local currency.

BlackRock Inc. strategists turned underweight short-dated US Treasuries from overweight, saying the extent of Federal Reserve interest-rate cuts the market is betting on is unlikely to pan out, Bloomberg reported.

Wei Li, the firm’s chief investment strategist, said speculation that the Fed waited too long to ease and will now be forced to cut at an accelerated pace to shore up the economy is misplaced.

Regardless of whether the Federal Open Market Committee reduces its key interest rate by 25 or 50 basis points, the Reserve Bank of India is anticipated to maintain its focus on domestic factors. While markets are divided on the size of the initial rate cut, India’s central bank may not immediately respond to the Fed’s actions.

"We maintain that the Fed's pivot will precede and influence the RBI's change in stance and rate action," said Madhavi Arora, lead economist at Emkay Institutional Equities.

Read more here.

Foreign inflows into India during the previous rate cuts have historically been negative in the short term in most instances. But India remains better places compared to its peers in the overall emerging markets this time, Citi said in its latest report.

According to Citi, global funds have been net negative in the immediate one to three months following the commencement of rate cuts in the US, in three out of four such instances.

"The key driver of short-term outflows is usually global risk-off scenarios," the report attributed.

Read more here.

Federal Reserve Chair Jerome Powell highlighted significant shifts in the US economy while speaking at the Jackson Hole Economic Symposium last month, signalling an adjustment in monetary policy. 

As inflation shows signs of stabilising and the labour market cools from its overheated state, Powell said: "Progress towards our 2% objective has resumed, and my confidence has grown that inflation is on a sustainable path back to 2%."

The Fed chief pointed out that the rise in unemployment was not due to elevated layoffs but rather a slowdown in hiring and a mismatch in the supply of workers.

Looking ahead, Powell said the worst of the pandemic's economic distortions were fading and the Fed remains vigilant.

Read more here.

The average contract rate on a 30-year fixed-rate mortgage, the most popular home loan in the US, decreased by 14 basis points during the week ending Sept. 13, reaching 6.15%, Reuters reported. This marks the lowest rate since September 2022 and follows a similar 14-basis-point drop the previous week.

The Sahm Recession Indicator is an economic rule of thumb that signals the start of a recession when the three-month average US unemployment rate rises by 0.50% or more from its 12-month low.

Historically, elevated Sahm levels have always been followed by aggressive rate reductions, such as those after the dot-com bubble burst in 2001, the 2008 financial crisis, and the Covid-19 pandemic in 2020.

The Federal Open Market Committee anticipates a soft landing for the US economy in 2024, that includes slowing GDP growth but no recession. However, as of September 2024, the New York Fed suggests a 62% probability of a recession in the next 12 months. A recession probability of over 60% has not been suggested since the early 1980s.

Supporting this, the Sahm Rule also stands at 0.57%, suggesting that the Fed might be behind the curve.

Read more here.

A 25 basis-point rate cut remains the base case following the latest US employment and inflation data, said Jefferies' Christopher Wood. The employment data continues to weaken without collapsing, while August inflation data is broadly in line with consensus expectations, he said.

The American Depository Receipts of Infosys Ltd. declined 2.09% and Wipro Ltd. by 1.92%.

The Federal Reserve's indications about possible interest rate reductions have significant implications for Indian markets, particularly for IT companies that heavily rely on the US market for their revenue. 

When interest rates rise in the US, it typically leads to reduced consumer expenditure and lower corporate investments, which can negatively impact the growth prospects of Indian IT firms. The IT sector has consistently shown sensitivity to broader US economic trends and monetary policy decisions.

A lower-than-anticipated cut in interest rate by the US Federal Reserve will have markets on edge and put Jerome Powell's wording in focus to understand the dovish trajectory, according to Andrew Holland, chief executive officer of Avendus Capital Pvt.

"If the cut this time is 50 bps, the markets have a further leg to grow," he told NDTV Profit. "If it is 25 bps, then Powell's words will be noted on the trajectory for the rest of the year."

The central bank maintained its key interest rate for the eighth consecutive time in July to hold its key interest rate at 5.25–5.5%.

The US Fed hiked its key interest rate from December 2021 to tame inflation and maintained status quo after its meeting on September 2023. Since then, Jerome Powell has remained hawkish and kept its growth priorities on the back seat.

The inflation print in the world's largest economy was on a rise since the latter half of 2019, as it lowered its rate 2.5% to 0.3%, to cushion the economy from the Covid-19 impact. The current rate upper bound range of 5.5% is at the highest since it was 6.5% in December 2000.

The US Dollar strengthened against major currencies ahead of the Fed rate decision.

• USD-Euro: up 0.17% at $1.11

• USD-British Pound: up 0.56% at $1.32

• USD-Japanese Yen: up 0.43% at 141.80

Gold prices rose 0.09% to $2,571.3 per ounce.

US stocks opened higher ahead of the FOMC decisions.

• S&P 500 up 0.1%

• Nasdaq 100 up 0.3%

• Dow Jones Industrial Average down 0.2%

• 10-year Treasury yield rises 3 bps to 3.68%

• Spot gold rises 0.3% to $2,576.95

• Bloomberg Magnificent 7 Total Return Index rises 0.3%

• Bloomberg Dollar Spot Index falls 0.2%

• Bitcoin falls 0.4% To $59,921.75

The international benchmark Brent crude slipped 0.7% to $73.22 per barrel at 7:00 p.m. India time. West Texas Intermediate, the US benchmark, was was also down 0.7% at $69.50.

• S&P 500 up 0.14% at 5,642.9

• Dow Jones up 0.08% at 41,621.60

• Nasdaq 100 up 0.25% at 19,482.7

US hiring fell short of forecasts in August after July’s payroll number was revised down, a development likely to fuel ongoing debate over how much the Federal Reserve should cut interest rates. Nonfarm payrolls rose by 142,000 following downward revisions to the prior two months, Bureau of Labor Statistics data showed.

The unemployment rate edged down to 4.2%, the first decline in five months, reflecting a reversal in temporary layoffs. Average hourly earnings rose 0.4%.

Just ahead of the Fed meeting, US retail sales unexpectedly rose in August, pointing to healthy consumer demand that continues to underpin the economy. The value of retail purchases, unadjusted for inflation, increased 0.1% in August after an upwardly revised 1.1% gain, Commerce Department data showed Tuesday. Excluding autos and gasoline stations, sales advanced for fourth month.

The figures indicate resilient household demand midway through the third quarter even as hiring and wage growth show signs of moderating. For Federal Reserve policymakers, the data also illustrate an economy on solid footing.

The US gross domestic product grew at a 3% annualised rate in the second quarter ending June, according to the Bureau of Economic Analysis' second estimate. That was an upward revision from the 2.8% rate reported last month, and higher than the 1.4% rise seen in the first quarter.

The US core consumer prices experienced an unexpected uptick in August, primarily driven by a significant increase in housing costs. The core consumer price index, which excludes food and energy costs, rose 0.3% from July and 3.2% from the previous year, according to data released by the US Bureau of Labor Statistics on Wednesday.

The overall inflation rate also increased by 0.2% from the previous month and 2.5% from August last year, partly offset by lower gasoline prices.

Economists tracked by Bloomberg had anticipated a 0.2% increase in both the consumer price index and the core gauge for August.

The meeting of the Federal Open Market Committee of the US Federal Reserve, which began on Tuesday, will conclude today, and some big announcements are expected with regards to monetary policy.

The current meeting will be the sixth this year and the last before the upcoming US presidential election. During the last FOMC meeting held in July, Powell had opted to maintain the status quo. The US Fed Reserve had kept the benchmark interest rates unchanged in the range of 5.25% to 5.50%.

Most analysts are split between anticipations of a 50 or a 25 basis points cut, with more tilting toward the former.