As part of our initiative to bring timely market information to California public agencies, CalTRUST Chief Executive Officer Laura Labanieh had a brief Q&A with State Street Global Advisors’ Vice President, Portfolio Strategist Will Goldthwait to reflect on this week’s Federal Reserve meeting:
Laura: We finally got a cut, and a 50bp one at that. Were you surprised with the outcome of this week’s meeting?
Will: I think a lot of people would agree with me when I say this was the most uncertain markets have been before an FOMC meeting. Usually, we see confidence improve behind a specific number of cuts as we get closer to a meeting, but just yesterday morning markets were pricing in a 65% chance of a 50bps cut. Though a larger cut wasn’t SSGA’s base case, I wouldn’t say it was a surprise, necessarily. The Fed has constantly reiterated the importance of data and I think the recent data on both jobs and inflation made them comfortable to cut at this magnitude. It is worth noting that Fed Governor Bowman dissented in favor of a smaller cut, marking the first dissent on an interest rate decision since 2005.
Laura: What were the key drivers for the larger cut?
Will: Last time we spoke I mentioned that the labor market was one of the main focuses of the Fed, and I think that was definitely evident in their decision. Overall, the labor market has continued to cool with jobs gains slowing, wage growth easing, and the jobs-to-workers gap narrowing. At Jackson Hole, Powell described the slowdown in the jobs market as “unmistakable” and highlighted that the labor market is weaker today than it was in 2019, before Covid. Powell in his post-meeting session yesterday mentioned that he did not want to wait for large layoffs (or until it’s potentially too late) to start policy easing.
Laura: What is the rest of the year looking like? Will we get more 50 bps cuts?
Will: The dot plot shows the FOMC favor an additional 50bps of cuts for the remaining two meetings of the year, with 9 dots forecasting 75 bps or less versus 10 dots that expected 100 bps or more of easing before year-end. Powell did reiterate that the dot plot is not a policy plan, that decisions would be made meeting by meeting, and that the FOMC would move “as fast or as slow as we think is appropriate.” At the moment, market expectations are leaning more towards 75bps of cuts before year end. But remember, the June SEP was basically useless within days of being produced given new data releases.
Laura: Do we think the Fed will be able to thread the needle and achieve the soft landing?
Will: It’s certainly possible. Powell stressed several times during his Q&A session that the economy is expanding at a solid pace and is supported by a strong labor market, resilient consumer spending, and stronger supply data. Most importantly, he noted that they would be nimble with their policy decisions, and we just saw their willingness to make a larger cut if necessary.
Laura: Any new news on QT?
Will: No changes to QT. Powell noted that reserves are still abundant and are expected to remain so with shrinkage coming mainly from overnight RRP. At this time, they’re not thinking about stopping the runoff and plan to continue QT even as they cut rates.