La Française: D-Day for the Fed

September 17, 2024

Interest Rates Fed

As confirmed by Fed Chair Jerome Powell and his colleagues since the Jackson Hole conference, the Federal Open Market Committee (FOMC) is poised to lower the benchmark federal funds rate at its upcoming meeting, marking the first cut since 2020.

Although the decision between a 25 or 50 basis point (bps) cut is still up in the air, we expect Fed officials to support an initial 50 bps rate cut in September, based on the current data, with one or two more likely by year’s end due to increasing downside risks in the U.S. labor market. The recent leaks in the Financial Times and Wall Street Journal also indicate that the Fed is probably going to cut by 50 bps.

Here is what we expect:

The Fed to reduce the federal funds rate by 0.50%, bringing the target range to 4.75%-5%. This reflects the FOMC's growing confidence that inflation is returning to the 2% target, despite August’s core CPI data which slightly exceeded expectations. We anticipate that the decision will not be unanimous.
Fed Chair Jerome Powell will likely signal that the pace and magnitude of future rate cuts will depend on overall economic data and the balance of risks.
Powell is expected to reiterate that risks to employment are increasing. However, he will emphasize that, despite some moderation, the U.S. labor market remains strong, with low levels of layoffs and an unemployment rate which is still favorable by historical standards.
Regarding the Summary of Economic Projections (SEP), we do not expect significant changes to growth and inflation forecasts, though we do anticipate higher unemployment projections in both 2024 and 2025. Nevertheless, the FOMC is likely to remain divided on the future direction of monetary policy, with projections potentially suggesting 100 bps of cuts in 2024.

In summary, the U.S. Federal Reserve will join other central banks, such as those in Europe, in cutting interest rates, starting with a 50bps reduction in September. Chair Powell is unlikely to provide clear guidance on future meetings, as the FOMC adopts a meeting-by-meeting approach. We anticipate a more dovish tone in September due to the downside risks facing the labor market.