Significant interest rate cut of 50 basis points! The Federal Reserve hints at another 50 basis point cut later this year, in firm support of employment.

As expected by the market, the Federal Reserve has begun a loosening cycle, cutting interest rates for the first time in four years. What excited the market even more was the Fed's unusually large rate cut right from the start, and further emphasis on the employment target in the decision statement, demonstrating a determination to curb a significant slowdown in the labor market. On Wednesday, September 18th, the Federal Reserve announced after the Federal Open Market Committee (FOMC) meeting that the target range for the federal funds rate was cut from 5.25% to 5.50% to 4.75% to 5.0%, a 50 basis point cut. This is the first rate cut since the Fed began this tightening cycle in March 2022. From March 2022 to July of last year, the Fed raised rates 11 times in a little over a year, totaling 525 basis points. Since July of last year, the Fed has held the policy rate steady at a high level reached in 2001 over eight consecutive meetings. This rate cut action by the Federal Reserve was in line with expectations, with the surprise factor being the size of the cut. The market had anticipated a rate cut, but there were differing opinions on the extent of the cut. Prior to the Fed meeting, starting last Thursday, senior reporters covering the Fed from the Wall Street Journal and the Financial Times hinted at the possibility of a 50 basis point rate cut, causing market expectations for a larger rate cut by the Fed to significantly increase. By the end of Tuesday, the tools of the Chicago Mercantile Exchange (CME) showed that the probability of a 50 basis point rate cut by the Federal Reserve this week was 63%, up from 34% a week ago, while the probability of a 25 basis point cut decreased from 66% to 37%. Journalist Nick Timiraos, dubbed the "new Fed news agency," subsequently wrote that the Fed's rate cut this time was larger than what most analysts had expected a few days prior, a decision that firmly places the Fed in a new stage of fighting inflation: the Fed is now trying to prevent past rate hikes from further weakening the labor market in the U.S. Timiraos' article noted that the 50 basis point rate cut may reflect what the Fed calls risk management considerations, with Fed officials weighing the risks of high inflation and rising unemployment rates among other economic threats, adjusting based on this evaluation, with the officials hoping to prevent a gradual worsening of conditions in the labor market. Slightly more than half of the decision-makers expect at least a 25 basis point rate cut at each of the remaining two meetings this year The dot plot shows that compared to the last dot plot updated by the Fed in June, officials' expectations for rate cuts over the next three years have significantly increased this time. The median expected federal funds rate for this year was lowered from 5.125% to 4.375%, and for next year, 2025, from 4.125% to 3.375%, both decreases of 75 basis points. The median expected rate for the year after next was lowered from 3.125% to 2.875%, a decrease of 25 basis points. Of the 19 officials providing forecasts, all of them expected rates below 5.0% this time, compared to only eight doing so in the previous meeting. Only two officials expected rates in the range of 4.75% to 5.0%, 7 expected rates in the range of 4.5% to 4.75%, 9 expected rates in the range of 4.25% to 4.5%, and one even expected rates below 4.5%, in the range of 4.0% to 4.25%. In other words, out of the 19 officials, a total of ten, nearly 53%, expect to cut rates by a total of 50 basis points this year. Slightly more than half of the officials expect that at the remaining two FOMC meetings in November and December, there will be at least a 25 basis point rate cut each time. The comparison between the rate expectations in the dot plots from the last meeting and this meeting shows that Fed decision-makers have essentially overturned all previous expectations. The median expected federal funds rate forecasts announced after the meeting show that compared to the outlook in June of this year, Fed officials have lowered their rate expectations for the next three years. The median rates for the next two years have each been reduced by 70 basis points, and by 20 basis points for the year after next. Based on the median expected values, Fed officials anticipate a total rate cut of 50 basis points this year after the September cut, meaning there could be two cuts of 25 basis points each, amounting to a total of 100 basis points cut this year. Specific median predictions are as follows: The federal funds rate at the end of 2024 is expected to be 4.4%, down from the June expectation of 5.1%. The federal funds rate at the end of 2025 is expected to be 3.4%, down from the March expectation of 4.1%. The federal funds rate at the end of 2026 is expected to be 2.9%, down from the March expectation of 3.1%. The federal funds rate at the end of 2027 is expected to be 2.9%. The longer-term federal funds rate is expected to be 2.9%, down from the March expectation of 2.8%. GDP growth and PCE inflation expectations for this year slightly decreased, while the unemployment rate forecast increased Although the rate expectations in the dot plot were significantly lowered, the economic outlook released after the meeting shows that Fed officials did not make major adjustments to their recent economic forecasts. The GDP growth forecast for this year was lowered by 0.1 percentage points, with no change in the forecasts for the following two years. The unemployment rate forecast for this year was increased by 0.4 percentage points, with an increase of 0.2 percentage points for the following two years. The PCE inflation rate forecast for this year and the core PCE inflation rate forecast were both reduced by 0.3 and 0.2 percentage points respectively, while the forecasts for next year were reduced by 0.2 and 0.1 percentage points. Specific predictions are as follows: The GDP growth forecast for 2024 is 2.0%, down from 2.1% in June, with no change in the forecasts for 2025 and 2026, which both remain at 2.0%. The forecast for 2027 is 2.0%, with a longer-term forecast of 1.8%, both unchanged from June. The unemployment rate forecast for 2024 is 4.4%, up from 4.0% in June, with the forecast for 2025 at 4.4%, compared to 4.2% in June, and 2026 at 4.3%, compared to 4.1% in June, with a forecast of 4.2% for 2027, and a longer-term forecast of 4.2%, unchanged from June. The PCE inflation rate forecast for 2024 is 2.3%, down from 2.6% in June, with the forecast for 2025 at 2.1%, down from 2.3% in June, and with no change for 2026.2.0% in 2027 is also expected to be 2.0%, with longer-term expectations consistent with June's expectations, still at 2.0%.In 2024, the core PCE is expected to be 2.6%. It is projected to be 2.8% in June. The expectation for 2025 is 2.2%, with a June projection of 2.3%. The expectation for 2026 remains the same as June at 2.0%, and the expectation for 2027 is also 2.0%. The statement released after the meeting by the Federal Reserve stated that, given the progress made in inflation and risk balance, the FOMC decided to cut interest rates by 50 basis points. Compared to the statement from the last meeting on July 31, this statement made changes to the guidance on interest rates and the evaluation of inflation and economic activity. The Fed changed its interest rate guidance that had remained unchanged since January, removing the statement made half a year ago that it was not appropriate to cut interest rates until there was more confidence in inflation moving towards 2%. In addition to continuing to emphasize its commitment to bringing inflation back to the Fed's target of 2%, this statement also added a section stating its commitment to supporting full employment and addressing risks in employment. The statement reaffirms the commitment to supporting full employment and bringing inflation back to the 2% target. The statement also mentions that the FOMC will carefully assess future data, changing prospects, and risk balance in considering new interest rate adjustments. There was one dissenting vote against the 50-basis-point rate cut, with Bowman becoming the first Fed official since 2005 to vote against the majority of FOMC members' decision. The market reacted positively to the Federal Reserve's decision to cut interest rates, with US stocks rising, US bond yields falling, and gold prices rising. After the Fed's decision to cut rates was announced, US stocks rose, US bond prices rebounded, yields fell, and gold prices rose. Within 3 minutes of the announcement, the yields on the 2-year US Treasury bonds that are sensitive to interest rates dropped by over 10 basis points, from above 3.64% to below 3.54%, and the benchmark 10-year US Treasury yield fell from above 3.69% to below 3.64%, erasing the earlier gains. Following the announcement, gold prices surged above $2590 from a slightly higher level of $2570 before the announcement, breaking through $2600 during Powell's press conference. Gold prices rose by nearly 1.2% during the day, but started to decline as the press conference began, leading to a reversal in US stocks in the afternoon. New York spot gold also rose by over 1% to a record high of $2627.2 before turning lower. This article is a reprint from "Wall Street See", written by Li Dan; GMTEight Editor: Jiang Yuanhua.