Powell Explains FOMC’s Rate Cut Decision

The Federal Reserve has officially begun its easing cycle, lowering the federal funds rate by 25 basis points to a new range of 4.00%-4.25%. This move, which was fully priced in by the market, marks a significant shift in monetary policy. However, the real story lies not in the decision itself, but in the Fed’s newly released economic projections, which offer a glimpse into the central bank’s outlook for the coming years.

Fed’s Dual Mandate and the Path Ahead

During his press conference, Fed Chair Jerome Powell explained the decision, highlighting the central bank’s attention to both sides of its dual mandate: price stability and maximum employment. Recent data shows a complex picture. While job gains have slowed and the unemployment rate has ticked up slightly, it still remains at a low level. At the same time, inflation has shown signs of moving higher, remaining “somewhat elevated.” This is a tricky balance to strike, as the Fed aims to support a slowing economy without reigniting inflationary pressures.

The central bank’s updated forecasts paint a clearer picture of their intentions. Officials now see the federal funds rate at 3.6% by the end of 2025, a notable drop from the previous projection of 3.9%. This new outlook suggests a more aggressive easing path, with projections implying an additional 50 basis points of cuts before the end of the year. This is a significant shift that could influence market expectations for the immediate future.

Divided Outlook and Market Reaction

Diving deeper into the projections reveals a split among policymakers. The updated “dot plot” shows that while a majority of officials—nine out of nineteen—believe two more cuts are appropriate for 2025, a smaller contingent sees only one cut or no further reductions at all. This divergence highlights the internal debate within the Fed about the appropriate pace of easing and the balance of risks to the economy.

Following the announcement, the market’s reaction was swift. The U.S. Dollar immediately sold off, with the US Dollar Index (DXY) falling to new lows. This suggests that the market interpreted the Fed’s projections as more dovish than anticipated, signaling a less favorable environment for the dollar and potentially paving the way for further gains in other assets. It’s a clear signal that even with an expected move, the details of the Fed’s long-term plan can still surprise the market and trigger an immediate response.