Markets Firmly Expect The Fed To Cut Interest Rates On September 18
Fixed income markets expect the Federal Open Market Committee to cut interest rates at its next meeting on September 18. There is a lot of evidence for this view based on both the FOMC’s own minutes and public statements.
Powell Signals Cuts Are Coming
Federal Reserve Chair Jerome Powell strongly hinted that a cut is coming during his Jackson Hole Economic Symposium speech. “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Powell stated.
FOMC July Meeting Minutes Signal Some Support For Rate Cut
In addition, the minutes from the FOMC’s July meeting hinted that a rate cut may be approaching. “All participants supported maintaining the target range for the federal funds rate at 5¼ to 5½ percent, although several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision,” the minutes stated. Of course, the FOMC did not cut rates in July, but the fact that “several” policymakers could have supported such a move, together with Powell’s more recent Jackson Hole statement, signals that a September interest rate cut is highly likely.
FOMC Projections
The FOMC last updated its economic projections in June. As such, they are now somewhat stale because inflation has cooled further since then and the unemployment rate has somewhat risen.
However, even in those projections, most policymakers were expecting one or two interest rate cuts in 2024, though a minority believed rates would be held steady. It is also worth noting that the FOMC only has three scheduled meetings remaining in 2024 on September 18, November 7 and December 18. Therefore, if the Fed were to cut rates this year, it has only three scheduled events to do so. The FOMC will also provide an update to its economic projections on September 18.
HOw Might Interest Rates Go?
Fixed income markets now project that the decline in interest rates by the end of 2024 could be substantial. The CME’s FedWatch Tool forecasts that the federal funds rate will most likely end 2024 at 4.25% to 4.5%. If so, that’s a full percentage point lower than current rates.
However, there’s substantial uncertainty around that estimate and a higher, or lower, degree of policy accommodation is possible. Still, the forecast calls for materially lower rates by December.
By the end of 2025, there is a greater dispersion of outcomes. Short-term interest rates of around 3% are viewed as most probable. However, the plausible scenarios here range from 2% to 4% for the Fed funds rate.
The FOMC’s own projections, again as released in June, are more hawkish in suggesting interest rates at the end of 2025 will be closer to 4%. However, the FOMC’s medium-term interest-rate expectation is a little under 3%, suggesting that’s approximately where policymakers view the neutral interest rate as being.
What To Expect
After last raising interest rates in July 2023, it appears likely, according to both financial markets and policymakers, that the Fed will cut interest rates on September 18.
However, there is greater uncertainty surrounding how rapidly interest rates may decline over the remainder of the year. Financial markets expect that rate cuts over the remainder of 2024 could be substantial, though policymakers have kept their options open. Unfortunately, this may suggest that markets anticipate further weakening of economic data, too, especially regarding the labor market.