FedScope, Vol. 24 No. 8
By: Thomas Rizzo
Fed Meeting Decision
During the July 31st, 2024, Fed meeting, the Federal Open Market Committee (FOMC) kept the target federal funds rate unchanged at 5.25% – 5.50%. Federal Reserve Chair Jerome Powell put the possibility of an initial September rate cut on the table. During the meeting Powell mentioned, “We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate”, after citing that greater progress towards lower inflation as well as a cooler job market no longer threaten to overheat the economy.
Monetary Policy Cycle Timeline
The Fed has kept the federal funds rate at a 23-year high of 5.25% – 5.50% since July 2023, after an aggressive series of hikes that began in March 2022. The potential close of this cycle of contractionary monetary policy comes on the back of promising economic data, providing a level of confidence that the tools that the Fed has implemented to fight inflation have worked. The economy has remained resilient, inflation has cooled, and the labor market has remained strong with subtle signs of cooling prior to the Fed meeting.
Future of Monetary Policy
Following the Fed meeting, on August 2nd, the July Jobs Report was released, indicating a weaker than expected labor market showing signs of slowed hiring with unemployment climbing to a 3 year high of 4.3%. Market participants are pricing in a 100% probability of the first rate cut occurring in September, that after the July Jobs Report is projected to be a 50 basis point cut based on market data.
Given the commentary from the July Fed meeting along with recent economic data, the conversation has changed from trying to determine when we should expect initial rate cuts, to trying to determine how many we should expect by year end. Taking a deeper dive into the probabilities below, you find that the market is fully pricing in consecutive rate cuts for each of the next 3 Fed meetings. These rate cuts may take the form of either 25 or 50 basis point cuts, cutting the federal funds target rate from a 23-year high of 5.25% – 5.50% to 4.00% – 4.25% in December.
Key Takeaways:
- After an aggressive series of rate hikes, the economy is showing signs of progress towards the Fed’s policy objectives.
- A weak July Jobs Report following the Fed meeting drove the market to price in a 50 basis point cut for the September Fed meeting.
- For the remainder of the year, the market has also priced in the possibility of a second 50 basis point cut in November followed by a 25 basis point cut in December.
- The target federal funds rate is projected to be cut from 5.25% – 5.50% to 4.00% – 4.25% in December.