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Senior leaders of Hancock Whitney's Asset Management team discuss the latest Fed news and its impact on markets and the economy.
Overview
The Fed for the first time in four years has announced an interest rate cut of 50 basis points (bps). It really wasn’t a surprise that the Fed cut rates as they have been signaling this policy pivot for months. What was unknown headed into the meeting was the size of the cut, 25 bps or 50 bps. In the Fed’s press release and Chairman Powell’s press conference, continued improvement in inflation coupled with growing concerns on the employment picture were cited as the primary reasons for the shift in policy.
The survey of Fed officials’ expectations indicates a median expectation of another 50 bps reduction by year end. The size of the official move and the expectations for further rate cuts seem to imply that the Fed’s Open Market Committee is shifting to a focus on job growth that they acknowledge has slowed. It is worth noting, however, that there was one dissenting vote, the first in over two years, which indicates that different members may now be seeing the data in different lights.
What it means
The Federal Reserve’s statutory mandate is to promote maximum employment and stable prices. One of the many tools at their disposal to achieve this mandate is the discount rate which is the overnight rate the Federal Reserve charges financial institutions for short term loans. In turn, this rate often sets the market rate for overnight or short term loans and deposits. Higher rates generally slow economic activity and inflation while lower rates allow more robust economic growth driving labor demand.
Key takeaway
Today’s announcement marks the first time the Fed has cut its overnight rate since the COVID crisis. Fed policymakers have assessed that once-rampant inflation is coming sustainably under control and no longer poses the same threat to the economy that it did. In that context, they are placing more emphasis on apparently deteriorating labor conditions by softening the headwind to economic activity. Without significant new data contradicting this view, they are likely to continue lowering the statutory rate. Investors, consumers, and businesses, meanwhile, are watching carefully the evolving path of economic growth.
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