The Federal Reserve has spent the last few years carefully balancing on a tightrope, trying to keep inflation in check on one side and the labor market steady on the other, all while juggling shifting economic data. Now, four years after the last rate cut, America’s long journey to a “soft landing” is entering its final phase.

Let’s get cutting: At yesterday’s Federal Open Market Committee (FOMC) meeting, the Fed cut interest rates by 50 basis points (0.50%) — signaling the end of a 2.5-year streak of aggressive rate hikes. Over that period, borrowing costs were raised to a generational high of 5.25-5.5% to corner decades-high inflation. This is expected to be the first of several cuts, with Fed Chair Jerome Powell saying the risks to both employment and rising costs are now balanced, and the move reflects a “recalibration” to “help maintain the strength of the economy and the labor market.”

• The US central bank now projects median interest rates to be 4.4% by the end of 2024, dropping to 3.4% in 2025 and 2.9% in 2026 — lower than predicted at the last meeting due to evolving economic conditions.
• KPMG Chief Economist Diane Swonk told Bloomberg TV, “The focus is now on unemployment and not allowing it to worsen,” as payroll averages fall and record downward revisions call labor market strength into question.

What Next?

Investors are now analyzing the Fed’s comments, especially since Powell mentioned the bank is “not on any preset course” and will adjust based on new data. But with what’s on hand, investors are positioning for every possibility.

• In response to the decision, the Russell 2000 jumped up to 2%, benefiting debt-heavy growth companies — while the S&P 500 and Nasdaq-100 rose 0.5% each.
• JPMorgan Asset Management’s Bob Michele told Bloomberg TV, “We’re selling clients to get into the bond market,” adding that “yields are at this level with $6.3T in cash building up.”

Moving the needle: The super-sized cut in lending costs will provide relief to households and businesses, lowering rates for mortgages, auto loans, and other lending. In the leadup to the decision, weekly mortgage demand surged 14% week-over-week as rates hit two-year lows. Businesses — which have been laying off workers and reducing job openings in response to higher rates — may also find reprieve. With three to four more cuts expected in 2024, the Fed’s shift from raising rates to cutting them could give the economy a much-needed boost.