The Fed Delivers – and Still Disappoints

Summary of Key Points Core Viewpoint - The Federal Reserve has initiated a new phase of gradual easing by cutting interest rates by a quarter-point, lowering the target range for the federal funds rate from 4.25%-4.50% to 4.00%-4.25% [1][2]. Economic Projections - Inflation is projected to rise to 3.1%, unchanged from previous estimates, while GDP growth has been upgraded to 1.6% from 1.4% [5]. - The unemployment rate is expected to increase to 4.5%, up from the current rate of 4.3% [7]. Fed's Dual Mandate - Fed Chairman Jerome Powell described the rate cut as a "risk management cut," indicating a shift in focus towards protecting jobs rather than solely combating inflation [2][8]. - The FOMC statement highlighted that downside risks to employment have risen, with 11 out of 12 Fed voters supporting the rate cut [3]. Dot Plot Analysis - The updated dot plot suggests approximately two more quarter-point cuts by the end of the year, but there is significant inconsistency in the forecasts among Fed members [4][10]. - Six members opposed the cut, indicating a hawkish sentiment within the committee [5]. Market Reactions - Following the announcement, market reactions were mixed, with the Dow up about 0.50%, the S&P flat, and the Nasdaq down modestly, reflecting uncertainty among investors [9][10]. - The 10-year Treasury yield rose to 4.076%, and the dollar strengthened by about 0.3% [10]. Future Outlook - The Fed's future actions will depend on incoming economic data, particularly the next CPI and PCE reports, which will be critical for the market's bullish case [10][11]. - There is a belief that if inflation stabilizes or decreases while job losses remain moderate, the Fed may proceed with additional rate cuts as indicated in the dot plot [11][15].