Daily Spotlight: Fed’s First Cut is 50 Basis Points

Summary

The Federal Reserve wrapped up its latest Open Market Committee meeting yesterday and, as expected, lowered the current federal funds rate for the first time since 2020. But the central bank surprised some by taking the rather extraordinary step of reducing the rate by 50 basis points (bps), as opposed to the normal 25-basis-point move. Why the big cut? In our opinion, the Federal Reserve is clearly shifting its focus from fighting inflation to protecting the employment environment. Since the Fed started raising rates in 2021, CPI inflation has fallen from readings above 9.0% to readings below 3.0% — and continues to edge toward the central bank’s goal of 2.0%. Meanwhile, the unemployment rate has increased from 3.4% to 4.1% and monthly payrolls gains have slowed from 300k to 100k. Indeed, the Fed has lifted its year-end target for the unemployment rate to 4.4% from 4.0% last June. Based on the Fed’s decision, its commentary, and the forecasts of its governors, we are making adjustments to our interest-rate outlook. We are maintaining our forecast for two more rate cut