The Federal Open Market Committee voted 11-1 to cut the federal funds rate target by half a percent Wednesday, to a range of 4.75% to 5.00%.
The move by the Fed was universally expected, but it was unclear whether they would opt for a cut of a quarter percent or this larger, half-percent cut.
The Fed also released an updated Summary of Economic Projections decision, showing that the median member of the rate-setting committee expects cooler inflation and higher unemployment in coming quarters than they expected in June, the last time the Fed released a Dot Plot.
The median projection for PCE inflation in the fourth quarter of this year was cut to 2.3% from 2.6% in the June Dot Plot, and the median for next year cut to 2.1% from 2.3%.
The median projection for Core PCE inflation excluding food and energy was cut to 2.6% in the fourth quarter of 2024 from 2.8% previously. The projection for the fourth quarter of 2025 was cut to 2.2% from 2.3%.
The projection for the unemployment rate was raised to 4.4% in the fourth quarter of this year from 4.0% in the June Dot Plot, and for the fourth quarter of 2025 was raised to 4.4% from 4.2% previously.
The FOMC changed the wording of their monetary policy statement to show that they are attaching equal importance to supporting the labor market and controlling inflation, a change from their single-minded focus on fighting inflation between 2022 and early 2024.
Where the previous statement said, “The Committee is strongly committed to returning inflation to its 2 percent objective,” the new statement reads, “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective” (Our emphasis on the changed wording).
Since the Fed last met, there were big downward revisions to the jobs statistics that show the labor market is not as strong as previous data indicated. Considering the downward revisions in the August jobs report, as well as the Preliminary Benchmark Revision to payrolls announced in mid-August, job growth in the 12 months through August was just 157,000 per month, much slower than the 218,000 12-month average through June in the latest data available when the Fed met previously on July 30 and 31.
Also, inflation is slowing more than FOMC members had dared to hope, largely due to a big drop in gasoline prices that has continued through mid-September. U.S. energy production is strong amid rapid advances in oil-producing technology and rapid adoption of solar energy, while energy demand is sluggish around the world, especially in Europe and China.
That has brought down prices of gas and diesel despite ongoing supply restraint by OPEC+ producers and uncertainty caused by the wars in the Mideast and Ukraine.
As the Fed pivots, interest rates will fall substantially over the next six to twelve months. That is very welcome news for credit-sensitive sectors of the economy like housing, manufacturing, and retailing of cars and other big-ticket consumer products, which bore the brunt of high rates. Those sectors are a coiled spring that will bounce back as interest rates fall, sustaining the current economic expansion into 2025.
Following the big September Fed rate cut, Comerica forecasts for the Fed to cut their target rate another quarter percent at the next two decisions, in November and December. That will lower the target rate to a range of 4.25% to 4.50% at the end of 2024.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
