Fed starts rate-cutting cycle with a bang - but wants it to be the only one

By Greg Robb

Economists say central bank's half-point decision is best characterized as a 'hawkish 50'

The Federal Reserve cut its policy interest rate by half of a percentage point on Wednesday, a more aggressive move than many economists expected.

The central bank opted to start "with a bang," said Paul Ashworth, chief North America economist at Capitol Economics.

Will there be more surprises ahead? It looks like the Fed hopes not. Here are some key things we learned from Fed Chair Jerome Powell's press conference Wednesday.

Powell tries to dampen expectations of more 50bp cuts

Several economists said they thought the Fed was attempting to pull off a "hawkish 50," meaning that they could do a large cut but make no promises of similarly large moves in the future.

Based on what the Fed put out Wednesday, the 50-basis-point cut "looks like it could be the only one," said Ashworth.

The Fed crafted a hawkish messages in several ways.

First of all, Powell repeatedly said he wasn't worried about the U.S. economy, and said the Fed wasn't "in a rush" to lower rates.

Secondly, the Fed's "dot plot" sent a hawkish message, with nine out of 19 Fed officials backing only one more 25-basis-point rate cut this year. Only a narrow majority - 10 officials - backed two such cuts.

Aditya Bhave, U.S. economist at Bank of America Securities, agreed with the characterization of a "hawkish 50" but said he didn't think the Fed would be able to pull it off.

If financial markets price in a half-point cut in November, the Fed will be reluctant to engineer a "hawkish surprise" with a smaller cut. So Bhave said he was forecasting another 50-basis-point cut and a 25-basis-point cut at the central bank's last two meetings of this year, followed by 125 basis points of cuts in 2025 - getting rates to "neutral" by the end of next year.

Just how concerned is the Fed about the labor market?

By moving rates by an aggressive 50 basis points, Powell opened the door to questions about whether the Fed is more worried about the economy than it is saying publicly.

Powell tried to be bullish on the outlook, saying that the risks facing the economy are "roughly in balance."

The rate cut "reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained," he said.

But looking at the details of the Fed's Summary of Economic Projections, which tracks how the central bankers view the risks to the economy, officials do appear more worried about the labor market.

A chart of these risk projections, tweeted on X by Matthew Boesler of Bloomberg, captures that policymakers are more concerned about the labor market relative to inflation.

Some regret for not cutting in July

Many economists had thought the Fed might cut at its prior meeting at the end of July, but officials decided to hold the policy steady.

There was some sense of regret on Powell's part for that decision. He said that if the Fed had seen the weak July jobs report prior to the meeting, it "might well" have started the cutting cycle at that time.

"Arguably, this might suggest that today's 50 was to an extent about regret for not having started easing earlier, in which case it could be seen as catch-up for the 25-basis-point cut that didn't happen in July," said former Fed Governor Larry Meyer in a note to clients.

-Greg Robb

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09-18-24 1935ET

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