The Fed Cuts Rates for First Time Since 2020

The Federal Reserve cut its benchmark interest rate by 50 basis points in line with market expectations on Wednesday and released its updated economic projections.

The Fed Decision Day

As expected, the FOMC chose to cut its key overnight borrowing rate (fed funds rate) by a half percentage point, or 50 basis points, at the conclusion of its two-day policy meeting on Wednesday.

This move shifts the federal-funds rate to a range between 4.75% and 5% and was the first U.S. interest rate cut since early 2020 (but is part of a growing global rate-cutting trend.)

The Fed Funds Rate for the Past 10 Years

Long-term borrowing rates, like mortgages, have been declining in anticipation of yesterday’s rate cuts with U.S. 30-year mortgage rates recently hitting a two-year low of 6.15%.

The Fed suggested its rate cut was partially aimed at preventing the cooling labor market from deteriorating further as the unemployment rate recently rose to 4.2%

The Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) initially reacted to the rate cut by rallying to fresh record levels but ultimately closed lower in the wake of the announcement. Both indices rose over 1% the following market day.

The Fed Revised Its Economic Projections

The Fed also released its updated “dot plot” in its newly released Summary of Economic Projections.

The latest projections show the Fed expects a median interest rate of 4.4% by the end of 2024 and a median interest rate of 3.4% by the end of 2025.

You can see the latest dot plot below.

The Fed has penciled in further rate cuts for November and December, likely in increments of 25 basis points and now expects a 2.9% long-term target Fed funds rate.

Of course, these current market expectations are flexible and will evolve as the economic data points evolve.

Based on the newly revised projections, the Fed expects the following in 2025:

• 2.0% real GDP growth rate 

• 4.4% unemployment rate (up from today’s 4.2% rate)

• 2.1% PCE inflation rate (down from today’s 2.5% rate)

• 2.2% Core PCE inflation rate (down from today’s 2.6% rate)

In other words, Fed officials believe they can engineer a soft landing for the economy—balancing inflation control without triggering a full recession.

Time will tell if they can succeed.

Takeaway: What Jerry Thinks

We are entering a new U.S. rate-cutting cycle. Declining interest rates along with a falling U.S. dollar index will serve as tailwinds for many asset prices, including many stocks, cryptos, and hard assets into the final weeks of 2024 and well into 2025. My advice: Don’t fight the Fed!