Fed Delivers Oversized Rate Cut as it Gains 'Greater Confidence' About Inflation

• The Federal Reserve on Wednesday kicked off what is expected to be a series of interest rate cuts with an unusually large half-percentage-point reduction, a move aimed at boosting a cooling job market, while continuing to push down on inflation.
• "This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%," Fed Chair Jerome Powell said in a press conference.
• Fed policymakers see the central bank's benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75%-3.00% range. The endpoint reflects a slight upgrade, from 2.8% to 2.9%, in the longer-run federal funds rate, considered a "neutral" stance that neither encourages nor discourages economic activity.
• U.S. stocks gained following the release of the statement and updated quarterly economic projections before reversing course to close lower on the day. The U.S. dollar was slightly stronger against a basket of currencies, while yields on U.S. Treasuries rose. Rate futures traders moved to price in even more easing than projected by the Fed, with the policy rate now expected to be in the 4.00%-4.25% range by the end of this year.
• The size of the cut announced on Wednesday will likely raise questions about the Fed's strategy, and whether policymakers were merely trying to account for the fast decline in inflation since last year, address concerns that the U.S. job market may be weakening faster than desired, or needed to ensure inflation fully returns to the target.
• Inflation, based on the Fed's preferred measure, is currently about half a percentage point above the 2% level, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3% by the end of this year and down to 2.1% by the end of 2025. The unemployment rate is seen ending this year at 4.4%, higher than the current 4.2%, and remaining there through 2025. Economic growth is seen at 2.1% through 2024 and 2% next year, the same as in the last round of projections issued in June.

 (Source: Reuters)