FOMC starts easing cycle with a bang

Summary

• The FOMC surprised some market participants today by reducing the target range for the federal funds rate by 50 bps. Concerns about the state of the labor market appear to have been the primary driver of the 50 bps move.

• But the FOMC signaled that it may not necessarily follow today's 50 bps rate cut with additional large reductions in upcoming meetings. The median dot in the so-called "dot plot" implies two 25 bps cuts if further easing is spread evenly over the two remaining meetings this year.

• Only one voter (Governor Michelle Bowman) dissented at today's policy meeting, preferring a 25 bps rate cut instead, but the dot plot indicates that a meaningful share of the Committee appears to be in no hurry to reduce the fed funds rate at a rapid clip.

• The FOMC may indeed slow the pace of rate cuts in coming meetings. But we remain of the view that monetary policy will be back near neutral in one year's time. That is, we look for the federal funds rate to be roughly 3.00%-3.25% or so by this time next year. We will formally update our meeting-by-meeting fed funds forecast in the coming days.

FOMC front loads easing cycle

Heading into today's FOMC meeting, there was more uncertainty among market participants about the outcome than there has been in some time. A rate cut, which would be the first since March 2020, was universally expected. But would the Committee reduce the target range for the federal funds rate by 25 bps or 50 bps? In the event, the FOMC decided to cut rates by 50 bps. The vote was 11-1 in favor, with the lone dissent coming from Governor Michelle Bowman. Just one dissent is not uncommon, but it is more uncommon for a member of the Board of Governors to vote against the policy decision. Today marks the first governor to dissent since 2005, and the first governor to dissent in favor of tighter policy since 1994.

The post-meeting statement highlighted the cooling in the labor market, saying that job gains had "slowed." In that regard, the economy created 267K jobs per month in the first quarter of the year, but that pace has nearly halved over the past three months. The statement also seemed to hint that concerns about the labor market had been the primary driver of the 50 bps move with the line "in light of the progress on inflation and the balance of risks [emphasis ours], the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point." The idea that the risks are skewed to the downside for the labor market was further reinforced by the addition of a line signaling that the Committee is "strongly committed" to supporting maximum employment in addition to the existing line about returning inflation to 2%.

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