The Fed closes a chapter with a rate cut ✂️

Looking back and looking forward 🔭

An AI-generated image of the Fed Chair getting ready to cut something.

The Federal Reserve announced its first interest rate cut since March 2020.

The Fed’s benchmark interest rate target range is now 4.75% to 5%, down from 5.25% to 5.5%.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the central bank said on Wednesday in its monetary policy statement. “Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2% objective but remains somewhat elevated.“

Markets appeared to receive the news favorably. The S&P 500 rallied to record highs following announcement.

Over the past week or so, markets had become split on whether the Fed would cut by 25 basis points or 50 basis points. So it wouldn’t be surprising to see some heightened market volatility in the near term as traders recalibrate their expectations. But in the big scheme of things, both rate cut scenarios arguably represented modest adjustments to what would continue to be relatively high interest rates.

Despite the rate cut, the Fed’s target rate range remains high. (Source: FRED)

This rate cut has been a long time coming with the inflation crisis behind us.

Fed Chair Jerome Powell teed up Wednesday’s announcement last month at the Kansas City Fed’s economic symposium in Jackson Hole.

“The time has come for policy to adjust,” he said. “The direction of travel is clear.“

“The upside risks to inflation have diminished, and the downside risks to employment have increased,” he noted.

Indeed, the unemployment rate has been trending modestly higher as excess demand for labor has faded and the economy has become less coiled.

In the coming days, weeks, and perhaps months, there’ll be plenty of discourse exploring whether or not Wednesday’s monetary policy move was precisely the right one. And everyone will be watching the labor market along the way.

But I think we shouldn’t lose sight of how much economic conditions have improved since the Fed launched its campaign to bring inflation down with tight monetary policy.

Closing a chapter triumphantly 📔

I think history will favorably remember the Fed’s monetary policy actions of the past four years.