Fed announces 50 basis point cut to US interest rates
Leading up to today’s Federal interest rate announcement, the question wasn’t whether or not the Federal Reserve would decide to cut rates; but rather, by how much. A month prior to today’s policy meeting, investor expectations for a 25 or 50 basis points (bps) cut were split 50/50. Over the following weeks, financial markets placed the probability of a 50 bps cut at around 30%, with the odds of a 25 bps cut much higher at around 70%, with expectations that Fed rate cuts would start slow. However, heading into the week of the announcement, these market priced probabilities swung again to favor a larger first cut.
Conflicting expectations for the pace of this long-awaited easing cycle can largely be attributed to mixed economic signals and ongoing fears of an impending recession. To keep monetary policy too tight with higher rates could stifle economic activity; however, a larger 50 bps first cut could be interpreted as the central bank acknowledging that the economy is weakening.
Today’s milestone 50 bps cut to the federal funds rate (which has been held in the 5.25%-5.50% range since July 2023) is surely a welcome relief to the market following months of hopeful cut expectations that didn’t come to fruition. The decision also aligns with the Federal Open Market Committee’s (FOMC) mandate to bring down inflation while subsequently protecting the US economy and maximizing employment. More importantly, this…
