Debate has raged about the size of any potential cuts coming after today's meeting
The US Federal Reserve has announced that it will cut interest rates for the first time in four years. The cut of 0.5 per cent brings the Fed’s overnight rate to 4.75-5 per cent.
In the leadup to the announcement investors had fully priced in a 25-basis point cut. There was some speculation that the Fed may go further and cut interest rates by a full 50 basis points. That expectation was tempered somewhat by a slightly higher than expected CPI print and a jobs report that showed an uptick in unemployment, but not a meaningful increase in layoffs.
Nevertheless, futures markets this morning implied a 62 per cent likelihood of a 50 basis point cut going into the meeting.
“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent,” the announcement reads. “In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.”
Earlier this week Lesley Marks, CIO of Equities at Mackenzie Investments, noted that a 50 basis point cut would imply a more significant slowdown in the US economy. She said that it could mean the widely predicted ‘soft landing’ of only one quarter of negative growth could turn into a full-blown ‘hard landing’ with the US falling into recession.
While equity markets have been waiting for a cut, Marks notes that a US recession should pose a significant headwind for equities.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated,” the statement reads. “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
