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the fed’s interest rate cut has landed!

at 2 a.m. beijing time on september 19, the federal reserve announced that the target range for the federal funds rate would be lowered from 5.25% to 5.50% to 4.75% to 5.0%, a decrease of 50 basis points.this is the first rate cut since the fed launched this round of tightening cycle in march 2022. after the fed announced its interest rate decision, u.s. stocks rose, u.s. treasury yields plummeted, gold rose rapidly, and the u.s. dollar index plunged; but then a major reversal occurred.

the sharp market fluctuations were closely related to the monetary policy press conference held by fed chairman powell, who said the fed was not in a hurry to cut interest rates and warned that no one should think that a 50 basis point rate cut was a new trend.

the latest published interest rate dot plot shows that compared with the dot plot released by the federal reserve in june this year, the federal reserve officials' expectations for interest rate cuts in the past three years have increased significantly. based on the median expectation, federal reserve officials expect that after this rate cut, the total rate will be cut by 50 basis points this year, which means that the total rate will be cut by 100 basis points this year.

major announcement from the federal reserve

at 2 a.m. beijing time on september 19, the federal reserve announced that the target range of the federal funds rate would be reduced from 5.25% to 5.50% to 4.75% to 5.0%, a decrease of 50 basis points. this is the first rate cut since the fed launched this round of tightening cycle in march 2022.

it is worth mentioning that this rate cut decision was not supported by all fomc voting members. the resolution statement shows that one person voted against a 50 basis point rate cut, while the dissenting fed governor bowman supported a 25 basis point rate cut. bowman thus became the first fed governor since 2005 to vote against the decision of the majority of fomc members at an fomc interest rate meeting.

looking back, from march 2022 to july last year, the federal reserve raised interest rates 11 times in more than a year, with a cumulative increase of 525 basis points. since july last year, it has remained unchanged for eight consecutive meetings, keeping the policy interest rate at its highest level since 2001.

the last time the fed cut interest rates was in march 2020, which means that there have been four and a half years between the two rate cuts.

the federal open market committee (fomc) wrote in a statement that recent indicators suggest that economic activity continues to expand at a solid pace, job growth has slowed, the unemployment rate has increased somewhat but remains low, and inflation has made further progress toward the 2% objective but remains somewhat elevated.

the fomc seeks to achieve full employment and 2% inflation over a longer period of time. the committee is more confident that inflation will continue to move toward 2% and judges that the risks to achieving the employment and inflation goals are roughly balanced. the economic outlook is uncertain, and the fomc remains concerned about the risks to its dual mandate.

in light of inflation progress and the balance of risks, the fomc decided to lower the target range for the federal funds rate by 0.5 percentage point, or 50 basis points, to 4.75% to 5%. in considering further adjustments, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

after the federal reserve announced its decision to cut interest rates, u.s. stocks rose, u.s. bond prices rebounded, gold prices rose, and the u.s. dollar index plunged; but then a major reversal occurred.

specifically, the three major u.s. stock indexes saw rapid gains, with the dow jones industrial average and the s&p 500 both hitting record highs during intraday trading. however, the three major indexes quickly gave up some of their gains and turned to declines across the board, with the dow jones industrial average down 0.25%, the nasdaq down 0.31% and the s&p 500 down 0.29%.

less than three minutes after the fed’s announcement, the interest rate-sensitive two-year treasury yield plunged more than 10 basis points, from above 3.64% to below 3.54%; the ten-year treasury yield dropped from above 3.69% to below 3.64%. but then, the decline quickly turned to an increase. as of around 4 a.m., the two-year treasury yield rose by 1.11% and the ten-year treasury yield rose by 1.89%.

after the interest rate decision was announced, spot gold rose rapidly, breaking through $2,590 an ounce at one point, setting a new record, and then plunged sharply, turning from an increase to a decrease. as of around 4 a.m., it fell 0.38% on the day to $2,559.76 an ounce.

the u.s. dollar index also staged a stunning reversal. after the announcement of the interest rate cut, it plunged sharply, falling to a low of 100.22 points, and then quickly rose, up 0.13%.

nick timiraos, a reporter known as the "new fed news agency," wrote that the fed's rate cut was larger than most analysts expected a few days ago. this decision has firmly put the fed into a new stage in the fight against inflation: the fed is now trying to prevent past rate hikes from further weakening the u.s. labor market.

timiraos said the 50 basis point rate cut likely reflects the fed’s so-called risk management considerations, as officials weigh the risks of various economic harms, such as higher inflation and rising unemployment, and make adjustments accordingly, hoping to avoid worsening the cooling of the labor market.

powell made a significant statement

the sharp market fluctuations were closely related to the monetary policy press conference subsequently held by federal reserve chairman powell.

at the press conference, powell first said that policymakers are fully focused on the dual tasks of inflation and employment, and the fed is now increasingly confident that the strong momentum of the job market can be maintained while adjusting the policy interest rate. this means that the 50 basis point rate cut is mainly to ensure a soft landing for the us economy.

on the economic front, powell noted that economic activity continued to expand at a "solid pace" and expected the second half of the year to grow at a similar pace as the first half. "the u.s. economy is in good shape, and our decision today is designed to keep it that way."

he stressed that there are currently no signs of a recession in the u.s. economy and he does not believe a recession is imminent.

on inflation, powell said that the inflation level is closer to the target, the upside risks to inflation have weakened, while the downside risks to the labor market have increased.

he said he believed inflation would fall to the 2% target. "while people may not think about inflation as much as before, they may notice higher prices, which is painful."

at the press conference, when asked about the fed's next move, powell emphasized that based on the balance of risks, the interest rate will be lowered by 50 basis points today, but no fixed interest rate path has been set and decisions will be made at each meeting.

as usual, powell reiterated that the next move depends on economic data. "more data, as always, don't look at anything else, the extent of the rate cut depends only on the data."

powell stressed that no one should think that a 50 basis point rate cut is a new trend, and no one should draw such a conclusion based solely on this rate cut. he said that fed officials widely support today's decision. although board member bowman voted against it (advocating a 25 basis point rate cut), the fomc members are more of a consensus.

regarding the neutral interest rate, powell said that he did not know the specific level, but it should be much higher than in the past (before the epidemic).

in terms of employment, powell claimed that the labor market is in good condition and hopes to maintain this state; but if the labor market slows down unexpectedly, the fed will accelerate the pace of interest rate cuts. powell believes that the current unemployment rate of 4.2% is very healthy. the high unemployment rate is partly due to the influx of immigrants, and the rise in unemployment rate is also due to the slowdown in recruitment.

dot plot released

the latest published interest rate dot plot shows that compared with the last updated dot plot released by the federal reserve in june this year, the federal reserve officials' expectations for interest rate cuts in the past three years have increased significantly.

the dot plot predicts that the median expected interest rate this year will drop to 4.375% from 5.125% last time. the median expected interest rate for next year, that is, 2025, will drop from 4.125% to 3.375%, a decrease of 75 basis points. the median expected interest rate for the year after will drop from 3.125% to 2.875%, a decrease of 25 basis points.

the median forecast of interest rates by fed officials released after the meeting showed that compared with the last outlook forecast in june this year, fed officials lowered their interest rate expectations for this year, next year and the next three years, with the expected interest rate levels for this year and next year reduced by 70 basis points and the interest rate for the year after that by 20 basis points. based on the median forecast, fed officials expect that after the september rate cut, there will be a total rate cut of 50 basis points this year, which means two 25 basis point rate cuts, which means a total rate cut of 100 basis points this year.

the economic outlook released after the meeting showed that federal reserve officials did not significantly adjust their expectations for the u.s. economy. they slightly lowered the gdp growth forecast for this year by 0.1 percentage point, and kept the gdp forecast for the next two years unchanged. the unemployment rate forecast for this year was raised by 0.4 percentage points, and by 0.2 percentage points for the next two years. the pce inflation forecast and core pce inflation forecast growth rates for this year were lowered by 0.3 and 0.2 percentage points, respectively, and by 0.2 and 0.1 percentage points, respectively, for next year.