There are those who speak of the end of an era and there are those who look with concern at the state of the US economy. The fact remains that, four years after the last cut and in a decision that until a few days ago most analysts considered highly unlikely, the Federal Reserve has opted to a maxi cut of 50 basis points, bringing Fed Funds target in a range between 4,75% and 5,0%. A more aggressive move than expected that aims to prevent the gradual cooling of the labor market from turning into a complete stop, but also to achieve the goal of a “soft landing” for the economy, avoiding the much-feared recession.
The Fed's announced forecast of cutting interest rates also goes in the same direction. another half point by the end of the year, likely 25 basis points at each of the remaining meetings for 2024. The median US central bankers expect the cuts to continue in 2025 (by 100 basis points) and 2026 (by another 50). According to the dot plot, rates will then fall to 4,4% in 2024, 3,4% in 2025 and 2,9% in 2026. The Fed will also continue to reduce its holdings of Treasuries, agency debt and agency mortgage-backed securities, the FOMC said in a note, with the aim of supporting maximum employment and returning inflation to its 2% target.
Powell: “US economy is solid, confident about inflation”
The maxi cut “is a sign of trust”, the Fed governor stressed Jerome Powell in the press conference following the announcement, stressing however that “the fight against inflation is not over yet”. “We are not saying that the mission is accomplished. But I have to say that we are encouraged by the progress we have made” in bringing inflation back to target.
“We know that the time has come to recalibrate our policy to be more appropriate, given the progress made on inflation and employment, moving to a more sustainable level. The Fed will move "as quickly or as slowly as we deem appropriate in real time," he added, confirming a data-driven approach. Decisions will be made "meeting by meeting," he stressed. However, this is only “of the beginning of the process”, which provides for an overall cut of 100 basis points for this year.
"The US economy is strong and we are committed to keeping it that strong,” said Chairman Jerome Powell, noting that average GDP growth is estimated to remain “solid” at +2% with an unemployment rate of 4,4% at the end of this year and inflation at 2,1% in 2025.
The Federal Reserve has in factI also updated the projections for the US economy, reducing growth estimates for 2024 from 2,1% to 2% and raising the unemployment rate from 4 to 4,4%. As for prices, inflation is expected at 2,3% this year (it was 2,6% in June) and 2,1% in 2025.
"Upside risks to inflation have receded“, added Powell, who noted that the patient approach adopted by the Fed over the past year has paid off on the price front. In announcing its historic decision, the American central bank reiterated its “commitment to maximum employment and 2% inflation,” the goals established in its mandate.
“The economic outlook is uncertain, and we will be alert to risks,” the Fed assured in the statement released at the end of the meeting, which shows that the decision was not unanimous. Governor Michelle Bowman, in fact, would have preferred a cut of a quarter of a point.
Powell: “Presidential Elections Have Nothing to Do with Cut”
During the press conference, Jerome Powell also responded to the controversy of recent days according to which there would be a correlation between the rate cut and the elections of November 5. Replying to a reporter, the number one of the Federal Reserve said: “The American presidential elections and therefore politics have nothing to do with it. The Fed will not take anything other than the economy into consideration in its decisions,” he stressed.
Wall Street rises after the Fed
Throughout the day, American stock markets maintained a wait-and-see approach, remaining around parity while waiting to see if the cut would be 25 or 50 basis points. After the Federal Reserve's announcement, Wall Street's main stock markets took the path of increases, with the Dow Jones which earns 0,3%, the S & P 500 which rises by 0,5% and the Nasdaq which achieved the best performance, recording a rise of 0,55%. Gold prices rose by 0,8% to 2.590,13 dollars.
