The cutting cycle begins

Paid subscriber analysis

The Fed cut interest rates by 50bps, pushing them down to 4.75-5.00%.

It is the beginning of a long anticipated cutting cycle.

However, even though 50bps was a bit of a surprise, and thus not fully priced in, it was the dot-plot that captured the attention, as usual:

How to interpret this? Well, rate cuts are certainly more dovish than before, as the Fed will cut at least another 50-75bps before the end of the year, and then another 100bps in 2025.

However, as I warned, markets will be scared if this cutting cycle is projected to be a reaction to a slowing economy. And the projections were quite defensive here. Unemployment rate was projected to grow to 4.4% by the end of the year (versus 4.0% last time - however this is only slightly higher than the last estimate of 4.3%). Inflation is also projected to be lower, as is growth, which represents a slight cooling of the economy.

In that respect, the 50bps makes sense. The Fed does not want to risk a slowing economy, nor higher unemployment, as Powell emphasized in his speech. They still seem to be centered around a soft landing. Inflation is indeed no longer the key issue, but all eyes are now on the labor market.

From the scenarios we talked about for the last two weeks, we got something in between these two: