The Federal Reserve Just Slashed Rates by 50 Basis Points

by Mark Lebida of Journey Strategic Wealth, 9/21/24

With the decision on Wednesday to lower interest rates (for the first time since March of 2020) by a substantial 50 basis points (bps), rather than the 25 bps cut we typically see at the beginning of an easing cycle, the Fed is showing confidence that the disinflation trend will continue.

Focus has shifted from the upside risks of inflation to the downside risks in the labor market. There’s still a long way to go to reach neutral (a policy rate considered neither too restrictive nor accommodative), and cutting more quickly could help avoid unnecessary economic damage.

According to the SEP (Summary of Economic Projections), Fed governors have penciled in an additional 50 bps of cuts for 2024, followed by an additional 100 bps of cuts in 2025. This is a significantly more dovish stance than earlier this year. In June, the median forecast was for a single 25 bps cut. The median “longer run” forecast rose from 2.8% to 2.9%.

Treasuries have rallied in recent months, and the yield curve has disinverted, but fixed income valuations still largely reflect a soft-landing or no-landing scenario, which makes it prudent to balance portfolio risks. Additional rate reductions — beyond what markets are currently pricing in — could be implemented if there is a continued slowdown in inflation or weakening in labor markets.

Powell also said the Fed is not “in a rush” to bring rates down and was non-committal on the likelihood of future 50 bps moves, but insisted it was determined not to fall behind and would remain flexible, based on incoming data.

What happens over the next few months remains to be seen. For now, let’s take a look at a few ways this week’s 50 bps rate cut might impact any upcoming financial moves or decisions:

Mortgages: If you're considering buying a home or refinancing, this is good news. Mortgage rates are likely to continue dropping, making borrowing for a home more affordable.

Car loans and credit cards: Expect to see lower interest rates on car loans and credit cards in the coming months, which could make big purchases or paying off debt a bit easier.

Savings accounts: High-yield savings accounts, CDs, and money market funds will likely offer lower yields going forward. If you’re using any of these vehicles, it might make sense to discuss alternative strategies for your savings.

Job market: Because businesses benefit from more accessible credit, lower rates typically lead to more hiring, which is generally a good thing overall for the economy.

Stock Market: Historically, stocks tend to perform well after rate cuts. The S&P 500 has gained 86% of the time in the year following the first rate cut in a cycle.

We don’t believe this Fed wants to be remembered as the Fed that was slow to raise rates in the face of inflation and then keep them high for too long — resulting in a recession. We anticipate more volatility from election uncertainty and federal bank decisions through the final months of 2024.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.

The Federal Reserve Just Slashed Rates by 50 Basis Points

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