The Fed plans earlier rate cuts due to declining inflation and a softening job market, signaling a more aggressive approach than expected.
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00:00The Federal Reserve plans to reduce interest rates earlier than expected, driven by a quicker
00:05decline in inflation and a softening job market.
00:08This signals a more aggressive approach to rate cuts than policy makers had previously
00:13projected.
00:14And to break all of this down is Josh Hurt, senior economist at Vanguard.
00:18Thanks for being here, Josh.
00:19Thank you for having me.
00:20So, the Fed has cut interest rates by half a percentage point, an unusually large adjustment.
00:25And as mentioned, many are calling this aggressive.
00:28So can you break down this decision announced today and what it means?
00:31Sure.
00:32Yes.
00:33I mean, it was slightly larger than we were expecting.
00:35You know, we were favoring a 25 basis point approach, but, you know, it was a very close
00:39call and, frankly, we saw the merits of a slightly larger increase this time, too.
00:45And I think, as you mentioned, and as Chair Powell mentioned today, you have seen, you
00:49know, substantial progress both in inflation and the labor market has cooled more substantially
00:54since the last meeting.
00:55So we saw it as a very close call, but, yes, larger than expected.
00:59So we really want you to give us the good, the bad, the ugly.
01:02What are some of the key takeaways from the FOMC?
01:04And did anything really surprise you other than the 50 BPS?
01:07Right.
01:08So, I mean, there was really four things that, you know, we were looking for today in the
01:14report and the press conference afterwards.
01:17Clearly, 25 versus 50 basis points was a really key question on a lot of investors' minds.
01:22So that was one thing.
01:23We certainly got that settled.
01:24But we were also very focused on what the statement of economic projections was going
01:28to show.
01:29So with the longer run path, both for what the Federal Reserve's intentions were this
01:33year as well as next year, were going to show, and I think in that case broadly aligned with
01:39what we would have expected, a little bit more front-loading in terms of rate cuts projected
01:44more so this year, a little bit less this year.
01:47By this time next year, signaling roughly 200 basis points lower in the interest rate,
01:53the Fed Funds rate.
01:55The other thing we really were looking for was the statement.
01:57What were they going to signal in terms of how are they characterizing inflation, unemployment?
02:02What were some of the thresholds and the language used for what it would take for further interest
02:06rate cuts?
02:07Really, nothing surprising there.
02:09They signaled largely the same sort of tone in terms of the unemployment rate, signaling
02:16a little bit greater confidence in what has happened with inflation over the last few
02:20months.
02:21They maintained a very data-dependent tone in terms of what it will take to see future
02:27interest rate cuts going forward.
02:29The last thing was really just the market reaction.
02:32Really wanted to see how the market was processing both the statement of economic projections
02:37as well as the 50 basis point move.
02:39Overall, it seems that the market is really processing this quite well, not any large
02:43moves in some of your broad measures today so far.
02:47We talk about how this is a positive reaction in the markets, but can you talk about, maybe
02:51this question is better for Jerome Powell, but why do you think that it wasn't more clearly
02:56signaled ahead of time that it would be 50, and do you think this is possibly to catch
03:00investors and consumers off guard a bit?
03:03I don't think so.
03:04I think this was fairly well communicated.
03:08Markets were generally pricing in a coin flip leading up to this weekend.
03:12There was some pretty clear press communications late last week that I think really did set
03:18the tone for where we were.
03:20I think overall, certainly on our team and some of the debates that we've had, this was
03:26a very close call, and there were some merits on both sides.
03:30So far, I think the challenges have been handled really well.
03:34So of course, we are in an election year.
03:35The election is coming up in November, and a big talker for a lot of people is the economy.
03:40How might the Federal Reserve's larger interest rate cut impact the Biden administration as
03:44well as Vice President Kamala Harris' presidential campaign with this?
03:50I wouldn't expect this to have a real material impact.
03:52You've seen through time the last few months that the economy is still doing quite well
03:59in terms of the Fed's mandates.
04:01They are coming into better balance, and they're clearly taking action on that.
04:05The good news for the end consumer, for businesses, you started to see some of this rate move
04:09already filter through into market pricing.
04:13The 10-year has moved over the last few months.
04:16We're seeing that the 30-year mortgage rate has declined now below 6.5 percent.
04:22So you are seeing some of this already transmit through the economy, even before today.
04:27But I wouldn't expect this to have a substantial impact on campaigns.
04:31All right.
04:32We talk, of course, a lot about inflation and economy here on Cheddar.
04:35So in your opinion, they talk about the cooling of inflation happening right now.
04:39What is the biggest threat to our economy at the moment?
04:42Well, clearly all eyes are on the labor market.
04:45This has been something we've been very closely watching, that the unemployment rate has risen
04:51a decent bit from its bottom, around 3.5 percent rate early last year.
04:56So you have seen a rise there historically.
04:59Once the labor market starts to soften, it continues to do so.
05:02So this is really where we're focusing on in the moment.
05:05But I also wouldn't take eyes off of inflation.
05:08The Fed's communication today essentially signaled that inflation, the fight inflation
05:13is more or less over by projecting in their SEP some very positive numbers there.
05:22But it's something that's still elevated.
05:24And as we start to process the economy, I think it's really worth paying attention to
05:27that side of the mandate as well.
05:29And continuing to speak about the economy, prior to the pandemic more than four years
05:33ago, many people are hoping for a lot of the same things we saw maybe 2019 and before
05:38that.
05:39But with this current economy, the ebb and flow, is this simply the new normal, and we
05:43should get used to it at this point?
05:45Well, the economy is certainly very cyclical.
05:48I wouldn't expect volatility to dissipate.
05:52We've actually done a lot of work around this, around elections, and we find that it actually
05:56does tend to dissipate a little bit before and right after elections, as markets, as
06:02households, businesses really process new information, et cetera, around these events.
06:08But clearly, we would expect to see cyclicality be something that's maintained and be very
06:15watchful of that, especially as we move into the next year.
06:20Today's really just the beginning of the easing cycle.
06:22In our view, there still would be a very long way to go in terms of the Fed really calibrating
06:28things appropriately.
06:29So still a lot to really keep an eye on.
06:32And you also talked about keeping an eye on the job market.
06:34We know that the U.S. added 142,000 jobs in August, really falling short of expectations
06:39while the unemployment rate dropped to 4.2% as unemployment is expected to rise slightly.
06:46So you mentioned this, but I want you to talk more about it.
06:48How is the Fed balancing job growth and inflation?
06:51They're saying they see inflation cooling, but the job market is still a little strange
06:55out there at the moment.
06:56Right.
06:57Well, the key thing to remember is that policy does work itself through the economy with
07:02a time lag.
07:03So it does take time.
07:04So certainly the Fed is looking to be a bit forward-looking here.
07:07They're moving before inflation is actually at 2%, but has been making substantial progress
07:13and appears to be on a trajectory that would keep it close to 2% over the near term.
07:19And same thing with the labor market.
07:20We've definitely seen cooling.
07:23We've actually, on a three-month basis, job creation has cooled to roughly around 100,000.
07:31Certainly on the private side, we're just around at 100,000.
07:34So that's a number that I think definitely caught our eye.
07:37Just a few months ago, you were really creating jobs at around 200,000 pace.
07:41So you've seen some slowing there without question.
07:45And those are going to be the two areas to keep watching.
07:48And the Fed is trying to act in some ways preventatively, certainly from the labor market,
07:52from Chair Powell's comments, today's move is really meant to keep the labor market at
07:58a stable place.
08:00It's very uncertain where the actual sort of natural rate of unemployment might be at
08:05this moment.
08:07And so they're really trying to keep it in a range around the current levels, perhaps
08:12moderately higher.
08:14And Josh, lastly, some investors really might interpret any rate cuts as a signal to possibly
08:18take risks right now, anticipating further cuts in the future, as was discussed.
08:23So how does the Fed plan to manage some of these expectations to prevent market overreactions
08:28to its decision made today?
08:31That was a key area of focus for us.
08:34Would Chair Powell be able to really communicate, even with a larger move today, that there
08:39was still work to be done really on both sides of the mandate?
08:43I think so far his comments really did do a decent job of communicating that.
08:49But I think, and certainly the statement of economic projections really forecasting the
08:53path ahead for the Fed did a very good job of that.
08:57They don't appear to be moving too aggressively.
09:00But that's going to be something that they're going to have to keep on, because we know
09:04markets are forward-looking.
09:06They're really looking for any signs to begin easing conditions even more substantially
09:12than was perhaps signaled today.
09:14So I'd say there's still work to do on that.
09:15But I think so far, from the initial comments in the press conference, that that message
09:21has been communicated pretty well.
09:23All right.
09:24We have to keep an eye on what happens next.
09:25Josh Hirt, senior economist at Vanguard, thanks for joining us here on Cheddar.