Compensatory Rate Cuts: Fed's September FOMC Meeting Review
On September 18th local time, the Federal Reserve held a Federal Open Market Committee (FOMC) meeting and released a statement highlighting the following points: 1) A rate cut of 50 basis points (BP), adjusting the federal funds rate to 4.75-5.00%.
2) The median forecast in the dot plot suggests two more rate cuts are expected within the year.
3) Summary of Economic Projections: Unemployment rate revised up, PCE revised down.
September meeting resolution: A rate cut of 50 BP, with inflation and employment risks broadly balanced.
1) The September meeting statement believes that more progress has been made in disinflation, with a slowdown in new job creation, and inflation and employment risks are broadly balanced.
The meeting decided to lower the policy rate by 50 BP and continue to reduce the balance sheet as planned.
2) However, we believe that there may be some rebound potential for U.S. inflation in the fourth quarter, mainly from three aspects: rent, durable goods inflation, and core non-durable goods.
If an event-driven shock causes the Fed to "front-load" its rate cuts, and it turns out to be only a "recession scare," the reflation pressure next year will tend to rise.
Advertisement
Press conference: The Fed is determined not to fall behind the curve, and does not recommend viewing a 50bp cut as "standard".
1) Key points of the press conference Q&A session: The Fed is determined not to fall behind the curve, a 50 BP rate cut is timely, and a 50 BP rate cut should not be seen as a new trend.
If the Fed had known the employment data for July at the last meeting, it might have cut rates at that time.
The Fed will continue to make decisions on a meeting-by-meeting basis in the future, and if the job market cools down rapidly, policy adjustments can be accelerated, but the Fed is not in a hurry to cut rates.
2) The slackening of the job market is a source of economic downside risk.
Since May, the unemployment rate has exceeded 4% and once rose to 4.3%, triggering the "recession signal" of the Sam Rule, which has attracted the Fed's attention to the economic downside risk.
In the short term, the process of the U.S. labor market shifting from a basic balance to slackening may continue, which is the basis for the Fed's dovish policy stance.
Summary of Economic Projections: The unemployment rate is revised up, and PCE is revised down, reflecting the two main reasons for the Fed's rate cut this time: concerns about the cooling job market and the outlook for disinflation.
The September Summary of Economic Projections lowered the real GDP growth expectation for 2024 by 0.1 percentage point, raised the unemployment rate forecast for 2024, 2025, and 2026 by 0.4, 0.2, and 0.2 percentage points respectively, lowered the core PCE forecast for 2024 and 2025 by 0.2 and 0.1 percentage points respectively, and lowered the PCE forecast for 2024 and 2025 by 0.3 and 0.2 percentage points respectively.
Dot plot: The median forecast suggests two more rate cuts within the year, with the room for rate cuts in 2026 being compressed.
The overall rate dot plot has shifted down, with rate cuts being "front-loaded".
The median rate for 2024 was lowered from 5.1% to 4.4%, implying that there is still room for two more rate cuts within the year, and the median rates for 2025 and 2026 were lowered by 0.7 and 0.2 percentage points respectively to 3.4% and 2.9%.
The room for rate cuts next year is 100 BP (consistent with the June meeting), but the room for rate cuts in 2026 is only 50 BP, highlighting the "front-loading" of this round of rate cuts.
The long-term neutral rate expectation was further raised from 2.8% to 2.9%.
Financial market performance: The market expects this round of rate cuts to reach 250 BP, and U.S. stocks fell.
1) After the meeting, the OIS implied federal funds rate fell by about 5 BP on average compared to last week, and has clearly shifted down since August.
The probability of a 50 BP rate cut in November rose from 15% last week to 34%.
The market currently expects the Fed to cut rates by 250 BP in this round, with a terminal rate of 3%.
2) After the resolution was announced, the U.S. dollar and U.S. Treasury yields fell briefly and then rebounded, and U.S. stocks fluctuated significantly.
As of the close of U.S. stocks, the Nasdaq fell by 0.3%, the S&P 500 fell by 0.3%, the Dow Jones fell by 0.3%, the U.S. dollar index rose to 101, and the 10-year U.S. Treasury yield rose by 6 BP to 3.72%.
Gold and crude oil prices rebounded briefly and then fell, with the spot price of gold once breaking through 2600 U.S. dollars.
Pay attention to the repair of rate-sensitive sectors after the rate cut, and the trend of U.S. Treasury yields is highly related to the pace of the Fed's rate cuts.
1) Pay attention to the rate-sensitive sectors of the U.S. economy.
Empirically, under the background of the Fed's rate cuts, rate-sensitive sectors such as real estate and manufacturing may benefit, and can radiate to China's furniture, home appliances, decoration, processed metal products, industrial machinery and other commodity exports.
This 50 BP rate cut may stimulate the above two chains.
2) Will U.S. Treasury yields experience a "reversal" similar to the second quarter of this year?
On the one hand, the Citi Economic Surprise Index has bottomed out and rebounded, and we are alerting to the risk of a rebound in U.S. Treasury yields.
On the other hand, the limited experience of "rate cuts under a soft landing background" shows that the "reversal" of U.S. Treasury yields is highly related to the pace of the Fed's rate cuts.
If the Fed's rate cut pace is "fast first and then slow", the reversal point may be at the end of the rapid rate cut phase, that is, the "first half" of the rate cut, such as in 1998.
Leave a Comment