The Federal Reserve ordered up a half-point rate cut on Wednesday, taking a first big step toward cutting its key rate a full percentage point by year's end. The S&P 500 flirted with record territory on the aggressive action to support a softening labor market, but ended slightly lower after Fed Chairman Jerome Powell painted a picture of a U.S. economy that's "in a good place."
Powell Touts Commitment 'Not To Get Behind'
Powell said that Fed policymakers don't think they're behind the curve. The big opening move is "a sign of our commitment not to get behind."
New projections released with the 2 p.m. policy statement penciled in two more quarter-point rate cuts in 2024, implying one at each of the year's final two meetings, then another full percentage points in cuts next year.
"If the economy remains solid and inflation persists, we can dial back policy restraint more slowly." He added that rates could come down faster if the labor market weakens.
Fed Rate-Cut Rationale
Chair Powell said that members of the policy-setting committee decided to "reduce the degree of policy restraint" so that "strength in the labor market can be sustained."
Powell noted that that jobs reports from July and August, as well as downward revisions to earlier job-growth data, played a big role in pushing the Fed to cut by a half-point.
BLS revisions showed 818,000 fewer jobs were added over the year through March than previously reported. That means employers added about 2.1 million workers, not 2.9 million. Private-sector job gains have slowed to 96,000 per month over the past three months from 155,000 at the end of 2023.
Powell said that further declines in job openings may translate into higher unemployment. He noted that the level of openings to unemployed persons has come down from 2 to 1 to nearly 1 to 1, which is still pretty strong historically. "The U.S. economy is in a good place," Powell said, and today's move is meant to keep it there.
Fed Interest-Rate And Economic Projections
Fed projections envision a year-end policy rate of 4.25% to 4.5%. That implies a quarter-point rate cut on Nov. 8 and Dec. 18, the final two Fed meetings of the year.
Wednesday's half-point Fed rate cut came with just one dissent among 12 voting members and Powell indicated "broad support" for the decision. However, the projections of individual Fed policymakers revealed a deeper divide.
Nine policymakers penciled in 75 basis points in cuts or less for all of 2024. Ten saw one percentage point in cuts or more.
Fed projections are penciling in an additional full percentage point of rate cuts in 2025. That would bring the federal funds rate down to a range of 3.25% to 3.5%.
The Fed continued to bump up its estimate of the long-run neutral Fed policy rate, to 2.9% from 2.8% in June. That implies that the neutral interest rate, one that neither accelerates nor restricts economic growth, is 0.9 percentage point above the rate of inflation. Many on Wall Street think that's still too low.
Fed projections indicate that the unemployment rate will average 4.4% in the fourth quarter of this year and stabilize around that level through 2025. The jobless rate ticked down to 4.2% from 4.3% in August but is still up a half-percentage point since the end of 2023.
The Fed meeting policy statement noted "greater confidence that inflation is moving sustainably toward 2 percent." New Fed projections show the Fed's primary inflation rate, based on the core PCE price index, slowing from 2.6% this year to 2.2% next year, lower than the 2.3% projection in June.
Fed Balance Sheet
Some Wall Street firms had anticipated that the Fed would bring its balance-sheet contraction, known as quantitative tightening, to an end if policymakers saw a need for a half-point rate cut to support a softening labor market.
However, that didn't prove to be the case.
Each month, the Fed is letting up to $25 billion in Treasury securities and $35 billion in government-backed mortgage securities run off its balance sheet as they mature, rather than reinvesting the sum.
"We're not thinking about stopping runoff," Powell said. "For a time," he said, rates can fall while the balance sheet contracts.
Fed Rate-Cut Surprise
Ahead of the Fed meeting policy announcement, markets saw 59% odds of a half-point Fed rate cut and 41% odds of a quarter-point move, according to CME Group's FedWatch tool.
In a Friday morning note, Deutsche Bank economists wrote that this level of uncertainty was a rarity, setting up the biggest Fed meeting surprise in 15 years — no matter the outcome.
What Do Fed Rate Cuts Mean For The S&P 500?
The S&P 500 dipped 0.3%, after briefly eclipsing Tuesday's intraday record near 5671. The S&P 500 is still up about 18% year to date.
History shows that the S&P 500 usually fares well after the Fed starts to lower interest rates. Over the prior nine rate-cutting cycles, the S&P 500 has gained nearly 10% on average in the six months following the first cut. The major exceptions came after the Fed began cutting in 2001 and 2007, because Fed easing didn't prove sufficient to avert recession and a hit to S&P 500 earnings.
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