The Federal Open Market Committee announced that it was cutting the target federal funds rate to a range of 4.75-5.00 percent – a 50 basis point cut in rates. The Summary of Economic Projections (SEPs, otherwise known as the dot plots) shows that a majority of FOMC members projects a year-end 2024 federal funds rate of 4.25-4.50 percent – another 50 bps below the new target rate. This suggests either two 25 bps cuts at each of the November and December FOMC meetings, or another 50 bps move at one of them. The median projections also looked for a slightly slower pace of real GDP growth for this year (2.1 vs. 2.0 percent from the June projection), modestly higher unemployment rate (4.4 vs. 4.0 percent), and a tad less inflation (2.3 vs. 2.6 percent for the PCE price index, and 2.6 vs. 2.8 for the core).
Looking ahead, the FOMC projects that the federal funds rate will drop by an additional 100 bps over the course of 2025 (4.25-4.50 percent down to 3.25-3.50 percent) – and with a further 50 bps in cuts in 2026 (and no change in 2027).
More front-loaded easing by the Fed makes it less likely that the current soft landing will result in a recession. But this comes with the cost of perhaps igniting a rebound in economic growth and higher inflation (or at least inflation falling by less).
Interestingly, looking at the individual responses by FOMC members, nine members projected the end of 2024 federal funds rate at 4.50-4.75 percent, while ten projected 4.25-4.50 percent – a pretty close call between another 25 or 50 bps in cuts for the rest of this year.
These projections are forecasts conditional upon the state of the economy, inflation, and financial markets. Unexpected movements in any of these three items could result in actual Fed policy in the future being different from these most recent projections.
But the key takeaways from today’s FOMC meeting are that the Fed does not view a near-term recession as likely, that inflation continues to move lower toward the Fed’s 2.0 percent goal, and that the Fed expects to ease further over the next couple of years. The relatively large projected decline in short-term rates suggests that the yield curve will continue to un-invert, as shorter rates drop by more than longer rates (a bull steepener).
David W. Berson, Ph.D.
Chief US Economist
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