Federal Reserve surprises with significant rate cut

The Federal Reserve unexpectedly cut interest rates by 50 basis points during its September meeting of the Open Market Committee, moving the federal funds rate to a range of 4.75% to 5%. This marks the first rate cut in over four years and ends a twelve-month period of stable rates. Analysts on Wall Street were taken aback, having mostly anticipated a more moderate cut of 25 basis points. However, the broader reduction was positively received by investors who had expected a more aggressive easing at the start of the rate-cutting cycle. “The Committee has gained increased confidence that inflation is moving sustainably towards 2 percent,” stated the Open Market Committee's announcement. In its updated summary of economic projections, the Fed revised its forecasts only slightly. Economic growth for the current year was lowered to 2% from 2.1% in June, while the predictions for 2025 and 2026 remained unchanged. Inflation projections were revised downward for both 2024 and 2025, while unemployment rates for 2024, 2025, and 2026 were adjusted upwards. The updated “Dot Plot” chart, a tool used by the Open Market Committee to signal future policy intentions, indicates a more aggressive trajectory for rate cuts. The median forecast for September now suggests 100 basis points of cuts in 2024, with the federal funds rate expected to fall to an average of 4.4% by year-end. This implies that the Fed might cut rates by 25 basis points at both the November and December meetings. Looking ahead, the “Dot Plot” signals that the federal funds rate will fall to a range of 3.25% to 3.5% by the end of 2025, implying additional cuts of 100 basis points. By the end of 2026, and in the newly introduced projections for 2027, rates are expected to decrease to 2.9%. This outlook represents a significant deviation from the Fed's June projections, which had only anticipated one rate cut in 2024, followed by 100 basis points of cuts in 2025 and 2026. All eyes are now on Fed Chair Jerome Powell’s press conference at 2:30 PM local time, where he will provide further insights into the central bank’s decision and economic outlook. The 50-basis point rate cut led to a sharp decline in the value of the US dollar, which weakened against all major currencies, particularly against the Japanese yen, which gained 1%.