Fed Cuts Interest Rates in September: An Overview

On Thursday, September 18th, the Federal Reserve announced a 25 basis point cut in interest rates, lowering the federal funds rate target range to 4%-4.25%. This decision marks a resumption of the rate-cutting cycle that had been paused since December of last year. New Fed Governor Stephen Miran dissented, advocating for a larger 50 basis point cut.

The dot plot reveals that 9 out of 19 officials anticipate two more interest rate cuts in 2025, while two expect only one cut, and six foresee no further cuts. Additionally, one official projects no need for any interest rate cuts at all this year.

Details of the Interest Rate Decision

Recent indicators suggest that growth in economic activity has slowed in the first half of this year. Job growth has slowed and the unemployment rate has edged up slightly, but remains low. Inflation has rebounded and remains elevated.

The Committee aims to achieve maximum employment and 2% inflation over the longer run. Uncertainty about the economic outlook remains high, and the Committee is monitoring the risks to its dual mandate and believes that downside risks to employment have increased.

In support of the stated goals, and in light of changes in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 25 basis points to 4%-4.25%. In considering whether to make further adjustments to the target range for the federal funds rate, the Committee will carefully assess the latest data, changes in the outlook, and the balance of risks. The Committee will continue to reduce its holdings of U.S. Treasury securities, agency debt, and agency mortgage-backed securities. The Committee is firmly committed to supporting maximum employment and returning inflation to its 2% objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Potential Market Implications

Lowering interest rates typically stimulates economic growth by reducing borrowing costs for individuals and businesses. However, it can also lead to higher inflation if demand outstrips supply. In this case, the Fed indicates that it will closely monitor economic data and adjust monetary policy as needed.

The divergence of opinions within the Committee, as evidenced by Miran's dissenting vote and the dot plot, suggests a level of uncertainty regarding the future path of interest rates. This may lead to volatility in financial markets as investors try to digest the conflicting signals.