As expected by the market, the Federal Reserve has initiated an easing cycle and cut interest rates for the first time in four years. What has excited the market even more is that the Fed started with an unusually large rate cut and further emphasized the employment target in its statement, reflecting its determination to curb the significant slowdown in the labor market.

On Wednesday, September 18th, Eastern Time, 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 launched its tightening cycle in March 2022. From March 2022 to July of last year, the Fed raised interest rates 11 times in just over a year, with a cumulative increase of 525 basis points. Since July of last year, the Fed has kept policy rates at the highest level since 2001, maintaining the status quo in eight consecutive meetings.

This interest rate cut by the Federal Reserve is in line with expectations, but the magnitude of the cut surprised some market participants. The market had fully expected a rate cut at the meeting, but there was disagreement on the size of the cut. Prior to the Fed meeting, starting last Thursday, with senior Fed reporters from The Wall Street Journal and Financial Times both suggesting the possibility of a 50 basis point rate cut, market expectations for a larger rate cut by the Fed increased significantly. As of the close on Tuesday, the tools of the Chicago Mercantile Exchange (CME) showed a 63% probability of a 50 basis point rate cut by the Fed this week, up from 34% a week ago, while the probability of a 25 basis point rate cut dropped from 66% a week ago to 37%.

Journalist Nick Timiraos, also known as the 'New Fed News Agency,' later wrote that the Fed's rate cut this time was even larger than most analysts had expected a few days ago, a decision that firmly puts the Fed in a new stage of fighting inflation: the Fed is now trying to prevent past rate hikes from further weakening the U.S. labor market.

Timiraos's article points out that the 50 basis point rate cut may reflect the Fed's so-called risk management considerations, that Fed officials are weighing the risks of various economic hazards such as high inflation and rising unemployment, and making adjustments based on this, hoping to prevent a further deterioration of the situation in the labor market.

More than half of the decision-makers predict at least a 25 basis point rate cut at the remaining two meetings this year.

The dot plot shows that compared to the last updated dot plot released by the Federal Reserve in June, Fed officials have significantly increased their expectations for rate cuts in the next three years.

The median expected interest rate for the dot plot this year has dropped from 5.125% to 4.375%, and the median expected interest rate for next year, 2025, has dropped from 4.125% to 3.375%. The reduction is 75 basis points for both years. The median expected interest rate for the following year has dropped from 3.125% to 2.875%, a reduction of 25 basis points.

Among the 19 officials who provided forecasts, all of them expect the interest rate to be below 5.0% this time, compared to only eight officials who expected the same last time. This time, only two people expect the interest rate to be between 4.75% and 5.0%, seven people expect the interest rate to be between 4.5% and 4.75%, nine people expect the interest rate to be between 4.25% and 4.5%, and one person even expects the interest rate to be below 4.5%, between 4.0% and 4.25%.

In other words, out of the 19 officials, a total of ten people, accounting for nearly 53%, expect a combined interest rate cut of at least 50 basis points this year. Slightly more than half of the officials expect there to be at least a 25 basis point rate cut at each of the remaining two FOMC meetings in November and December of this year.

The chart below shows the changes in the interest rate expectations of Federal Reserve officials reflected in the dot plot. The blue dots represent the expectations of the September dot plot, while the gray dots represent the expectations of the June dot plot.

By comparing the interest rate expectations of the previous and current dot plots, it can be seen that Federal Reserve policymakers have actually overturned all of the expectations from the previous dot plot.

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.

Specific median forecasts are as follows:

The federal funds rate at the end of 2024 is expected to be 4.4%, compared to the 5.1% forecast in June this year.

The federal funds rate at the end of 2025 is expected to be 3.4%, compared to the 4.1% forecast in March.

The federal funds rate at the end of 2026 is expected to be 2.9%, compared to the 3.1% forecast in March.

The federal funds rate at the end of 2027 is 2.9%.

The longer-term federal funds rate is 2.9%, compared to the 2.8% forecast in March.

This year's GDP growth rate expectations and PCE inflation expectations have been slightly lowered, while unemployment rate expectations have been raised.

Although the dot plot's interest rate expectations have been significantly lowered, the economic outlook published after the meeting shows that Fed officials did not make significant adjustments to recent economic expectations. They slightly lowered this year's GDP growth forecast by 0.1 percentage point, with unchanged GDP expectations for the following two years. The unemployment rate expectation for this year was raised by 0.4 percentage points, and by 0.2 percentage points for the following two years. The PCE inflation expectations and core PCE inflation expectations for this year were lowered by 0.3 and 0.2 percentage points, respectively, with next year's expectations lowered by 0.2 and 0.1 percentage points.

Specific forecasts are as follows:

The GDP forecast growth rate for 2024 is 2.0%, down from the June forecast of 2.1%. The expected growth rates for 2025 and 2026 remain at 2.0%, the same as the June forecasts. The 2027 forecast growth rate is 2.0%, while the longer-term forecast growth rate is 1.8%, consistent with June.

The unemployment rate expectation for 2024 is 4.4%, up from the June forecast of 4.0%. The expected unemployment rate for 2025 is 4.4%, up from 4.2% in June, and for 2026 is 4.3%, up from 4.1% in June. The 2027 forecast is 4.2%, with the longer-term unemployment rate expectation at 4.2%, consistent with June.

The PCE inflation rate forecast for 2024 is 2.3%, down from the June forecast of 2.6%. The 2025 forecast is 2.1%, down from 2.3% in June, with the 2026 forecast remaining at 2.0%. The 2027 forecast is also 2.0%, consistent with both the longer-term and June forecasts at 2.0%.

The core PCE forecast for 2024 is 2.6%, down from the June forecast of 2.8%. The expected rates for 2025 are 2.2%, down from 2.3% in June, with the 2026 forecast remaining at 2.0%. The 2027 forecast is also 2.0%.

Additional commitments have been made to support full employment, while having more confidence in inflation. The risks regarding employment and inflation are broadly balanced.

In the post-meeting resolution statement, the Federal Reserve stated that, given progress in inflation and risk balance, the FOMC decided to cut interest rates by 50 basis points. Considering changes in the interest rate guidance, evaluation of inflation and economic activity compared to the previous meeting statement as of July 31.

The Fed revised the interest rate guidance that has remained unchanged since January, deleting the sentence previously expressed in the past six months: "The (FOMC) committee expects not to lower rates until they have more confidence that inflation is steadily moving towards 2%."

In addition to continuing to emphasize the commitment to bringing inflation back to the Fed's 2% target, this decision also added a part emphasizing the commitment to supporting full employment and highlighting the avoidance of employment risks. The decision states: "The (FOMC) committee is steadfast in its commitment to supporting full employment and bringing inflation back to the 2% target."

"The (FOMC) committee is steadfast in its commitment to supporting full employment and bringing inflation back to the 2% target."

This decision states that, in considering "new" interest rate adjustments, the FOMC will carefully assess future data, evolving outlook, and risk balance.

The previous meeting statement added a focus on the employment target, stating, "The economic outlook is uncertain, and the (FOMC) committee is concerned about the two-sided risks facing the dual mandate." This statement is reiterated in this decision.

At the same time, this decision affirms the progress in inflation, stating that "the committee is more confident that inflation is steadily moving towards 2%", and no longer reiterating "the risks of achieving the employment and inflation objectives continue to trend toward better balance", but rather changing it to "the risks of achieving the employment and inflation objectives are broadly balanced."

Revised to indicate that employment growth has slowed, and inflation has made further progress, reiterating that inflation has remained somewhat elevated.

This resolution modified the comments on inflation. The previous resolution stated, 'Inflation has slowed somewhat over the past year, but remains somewhat high. Some further progress has been made in achieving the inflation target.' This resolution states, 'Inflation has made further progress towards the committee's 2% target, but remains somewhat high.'

This resolution made adjustments to the assessment of the economic situation. The previous statement mentioned that job growth had slowed, and the unemployment rate had increased but remained low. This resolution states that 'job growth has slowed down', maintains the same assessment of the unemployment rate, and continues to reiterate that recent indicators show continued steady expansion in brokerage activities.

Regarding the reduction of quantitative tightening (QT) plans, this statement continues to use the wording from the previous statement, stating that the FOMC will continue to reduce its holdings of U.S. Treasury bonds, agency debt, and agency mortgage-backed securities (MBS).

Only one member of the committee voted against the 50 basis point rate cut. Bowman becomes the first Fed official to cast a dissenting vote since 2005.

It is worth mentioning that the interest rate cut decision did not receive unanimous support from all FOMC voting members. The resolution statement shows that among the FOMC voting members, 11 voted in favor of a 50 basis point rate cut, while only one voted against it. The dissenting member, Fed Governor Bowman, advocated for a small rate cut to begin an easing cycle and supported a 25 basis point rate cut.

As a result, Bowman becomes the first Fed official since 2005 to cast a dissenting vote against the majority of FOMC members in interest rate meetings.

It is noted that Bowman has been cautious about the slowdown in inflation. She held this view until a month ago. In a speech on August 20th, she stated that price increases were still higher than the Fed's 2% target and suggested 'gradual' rate cuts.

Some media outlets have reported that before 1995, dissenting views among Fed officials during meetings were not uncommon. However, out of the more than 90 dissenting views since then, the majority have been dissenting votes from the Fed Chair. The Fed Chair usually seeks consensus on decisions and sometimes reaches compromises to avoid public opposition, as it may be seen as undermining their credibility.

There are also media reports that the decision of the Federal Reserve's meeting rarely encounters dissent, especially during Powell's tenure as chairman. The last time a voting member of the FOMC disagreed with the overall decision was in June 2022, when a regional Fed president voted against it. Esther George, the then president of the Kansas City Fed, advocated a small rate hike.

The red text below shows the content deleted and added in this resolution statement compared to the previous one.

Market reaction: US stocks rise, US bond yields decline, gold rises.

After the Federal Reserve's interest rate decision was announced, US stocks rose, US bond prices rebounded, yields declined, and gold rose.

The three major US stock indexes quickly expanded their gains and hit new daily highs. Before the announcement of the decision, the Nasdaq, which rose more than 0.1%, increased by nearly 1.2%; the S&P, which was slightly up before the announcement, increased by nearly 1%; the Dow, which was roughly flat before the announcement, rose more than 370 points, or 0.9%. However, all three indexes quickly gave back some of their gains and turned lower in the final trading hours.

Within less than 3 minutes after the announcement of the decision, the yield on the 2-year US Treasury, which is sensitive to interest rates, plunged more than 10 basis points, dropping from above 3.64% to below 3.54%, while the benchmark 10-year US Treasury yield dropped from above 3.69% to below 3.64%, erasing its intraday gains and turning lower.

After the announcement of the resolution, spot gold, which was slightly higher than $2570 before the announcement of the resolution, quickly broke through $2590 and once exceeded $2600 when Powell's press conference was about to begin, refreshing the intraday high record set on Monday. It rose nearly 1.2% intraday, but retreated continuously after the press conference started, and US stocks turned lower in midday trading. NYMEX futures also rose more than 1% to a new high of $2627.2 during the session before turning lower.

This article is reproduced from "Wall Street News", author: Li Dan; edited by Zhongtong Finance and Economics: Jiang Yuanhua.