At 2:00 a.m. on September 19th Beijing time, the Federal Reserve announced that the target range for the federal funds rate would be reduced from 5.25%−5.50% to 4.75%−5.00%, a decrease of 50 basis points. This is the first rate cut since the start of the Federal Reserve's tightening cycle in March 2022. After the announcement, U.S. stocks rose, U.S. bond yields plunged, gold quickly surged, and the U.S. dollar index plunged; but then all experienced a major reversal.

The sharp market fluctuations are closely related to the subsequent monetary policy press conference held by Federal Reserve Chairman Powell. He stated that the Federal Reserve is not eager to cut interest rates and also warned that no one should assume that a 50 basis point rate cut is a new trend.

The latest dot plot shows that compared to the dot plot released by the Federal Reserve in June of this year, this time the expectations of Federal Reserve officials for interest rate cuts in the next three years have been significantly increased. In terms of the median expectation, Federal Reserve officials expect a total of 50 basis points of rate cuts after this rate cut, meaning a total of 100 basis points of rate cuts within the year.

Major announcement from the Federal Reserve

At 2:00 a.m. on September 19th Beijing time, the Federal Reserve announced that the target range for the federal funds rate would be reduced from 5.25%−5.50% to 4.75%−5.00%, a decrease of 50 basis points. This is the first rate cut since the Federal Reserve's tightening cycle began in March 2022.

It is worth mentioning that this rate-cut decision did not receive support from all FOMC voting members. The decision statement shows that one member voted against a 50 basis point rate cut, and FOMC board member Bowman supported a 25 basis point rate cut. As a result, Bowman became the first Fed board member since 2005 to vote against the majority of FOMC members' decision at an FOMC rate meeting.

Looking back, from March 2022 to July of last year, the Federal Reserve raised interest rates 11 times in a row over more than a year, accumulating a total of 525 basis points. Since July of last year, the policy rate has remained at a high level not seen since 2001 in eight consecutive meetings.

The last time the Federal Reserve cut interest rates was in March 2020, which means that two interest rate cuts have been separated by four and a half years.

The Federal Open Market Committee (FOMC) wrote in its statement that recent indicators indicate that economic activity continues to expand at a steady pace, employment growth has slowed, the unemployment rate has risen but remains low, and inflation has made further progress towards the 2% target but remains somewhat high.

The FOMC seeks to achieve full employment and a 2% inflation rate over a longer period of time. The committee's confidence has increased that inflation continues to move towards 2%, and it assesses that the risks to achieving employment and inflation goals are roughly balanced. The economic outlook is uncertain, and the FOMC remains focused on the risks to its dual mandate.

Given inflation progress and balanced risks, the FOMC has decided to lower the target range for the federal funds rate by 0.5 percentage points, from 4.75% to 5%. When considering further adjustments, the committee will carefully assess incoming data, evolving outlook, and risk balance.

After the announcement of the Fed's interest rate cut, US stocks rose, US bond prices rebounded, gold surged, and the US dollar index plunged; but later all experienced a big reversal.

Specifically, the three major US stock indexes rapidly expanded their gains, with the Dow Jones Industrial Average and the S&P 500 Index hitting intraday record highs. However, shortly after, the three major indexes quickly gave up some of their gains and all turned downward, with the Dow Jones falling 0.25%, the Nasdaq falling 0.31%, and the S&P 500 Index falling 0.29%.

Within less than 3 minutes after the Fed's announcement, the yield on the interest rate-sensitive two-year US Treasury bonds plunged more than 10 basis points, dropping from above 3.64% to below 3.54%; the yield on the 10-year US Treasury bonds dropped from above 3.69% to below 3.64%. However, it quickly reversed from a decline to a rise. By around 4 AM, the yield on the two-year US Treasury bonds rose 1.11%, and the yield on the 10-year US Treasury bonds rose 1.89%.

After the interest rate decision was announced, spot gold quickly surged, briefly breaking through $2590 per ounce and setting a new record high. However, it also experienced a sharp reversal, transitioning from a rise to a fall. By around 4 AM, it was down 0.38% for the day, at $2559.76 per ounce.

The US dollar index also staged a shocking reversal, plunging sharply after announcing the interest rate cut, hitting a low of 100.22 points, then quickly rebounding and rising by 0.13%.

Reporter Nick Timiraos, known as the 'New Fed Communications Agency,' wrote that the Fed's rate cut this time was even larger than most analysts had expected a few days ago. This decision has firmly put the Fed into a new stage of inflation struggle: the Fed is now trying to prevent past rate hikes further weakening the US labor market.

Timiraos pointed out that the 50 basis point rate cut may reflect the Fed's so-called risk management consideration, where Fed officials weigh various economic risks such as high inflation and rising unemployment, and make adjustments based on this. Officials hope to avoid a gradual deterioration of the labor market situation.

Powell's weighty statement

The sharp market fluctuations are closely related to the press conference on monetary policy held by Fed Chairman Powell afterwards.

During the press conference, Powell first stated that policy makers are fully focused on the dual tasks of inflation and employment. The Fed now increasingly believes that, while adjusting policy rates, the strong momentum in the job market can be maintained. This means that the 50 basis point rate cut is mainly to ensure a soft landing for the US economy.

Regarding the economy, Powell pointed out that economic activity continues to expand at a 'steady pace', with growth in the second half of this year expected to be similar to the first half. 'The usa economy is in good condition, and our decision today is aimed at maintaining this situation.'

He emphasized that there are currently no signs of an economic recession in the US, and he does not believe that an economic recession is imminent.

Regarding inflation, Powell stated that the inflation level is closer to the target, upward inflation risks have diminished, while downward risks in the labor market have increased.

He said he believes the inflation rate will drop to the target level of 2%. "Although people may not consider inflation as frequently as before, they may indeed notice higher prices, which is painful."

At the press conference, when asked about the Fed's next move, Powell emphasized that, in consideration of the balance of risks, today the interest rate will be cut by 50 basis points, but no fixed interest rate path will be set, and decisions will be made step by step through subsequent meetings.

As usual, Powell reiterated that the next step will depend on economic data. "More data, as always, without looking at anything else, the size of the interest rate cut depends only on the data."

Powell stressed that no one should assume that a 50 basis point rate cut is a new trend, and should not make such a conclusion based solely on this rate cut. He said that Fed officials broadly support today's decision, although Board member Bowman voted against (advocating a 25 basis point rate cut), the majority of FOMC members reached consensus.

Regarding the neutral interest rate, Powell stated that he also does not know the specific level, but it should be much higher than in the past (pre-pandemic).

In terms of employment, Powell claimed that the labor market conditions are good and hopes to maintain this state; but if the labor market unexpectedly slows down, the Fed will accelerate the pace of rate cuts. Powell believes that the current 4.2% unemployment rate is very healthy, and the increase in the unemployment rate is partly due to a large influx of immigrants, as well as a slowdown in recruitment.

Dot plot released

The latest release of the dot plot shows that compared to the previous dot plot released by the Fed in June, this time Fed officials have significantly increased their expectations for interest rate cuts in the next three years.

The median expected interest rate in this year's dot plot has dropped from 5.125% to 4.375% since the last update. Next year, in 2025, the median expected interest rate has dropped from 4.125% to 3.375%, a decrease of 75 basis points. The expected interest rate in the following year has dropped from 3.125% to 2.875%, a decrease of 25 basis points.

According to the median value of interest rate forecasts released after the meeting, Federal Reserve officials have lowered their interest rate expectations for the next three years compared to the last outlook in June this year. The expected interest rates for the next two years are lowered by 70 basis points, and 20 basis points for the year after. Calculated based on the median forecast, Federal Reserve officials expect a total of 50 basis points rate cut after the rate cut in September, which means there may be two 25 basis points rate cuts, totaling 100 basis points rate cuts within this year.

The economic outlook released after the meeting shows that Fed officials have not made significant adjustments to their expectations for the U.S. economy. They have slightly lowered this year's GDP growth forecast by 0.1 percentage points, while keeping the GDP forecast unchanged for the next two years. The unemployment rate forecast for this year has been raised by 0.4 percentage points, and by 0.2 percentage points for the next two years. The forecast for PCE inflation and core PCE inflation in this year has been lowered by 0.3 and 0.2 percentage points respectively, and by 0.2 and 0.1 percentage points respectively for next year.

Editor/Emily