Fed Cuts Rates by .50%: What Investors Need to Know

In this article we review:

• Why we believe the Federal Reserve decided upon a .50% reduction in the federal funds target range at its September meeting
• The newly released dot plot of Fed member rate expectations for year-end 2024 and year-end 2025
• Adjustments to our interest rate forecasts for year-end 2024 and year-end 2025
• How this action by the Fed potentially impacts fixed income and equity markets in the year ahead

At its September meeting, the Federal Reserve enacted its most aggressive rate cut in more than four-and-a-half years in reducing the federal funds rate by .50% to a target range of 4.75%–5.00%. Against this backdrop, we view the following points as important to investors:

• Tipping point in Fed’s decision. We view the deciding factor in the Fed’s decision to cut rates by .50% as being recent employment trends, which, in addition to displaying a slowing pace of jobs growth, has also included meaningful revisions to previous data over the past year-and-a-half. Based on the July and August nonfarms payroll, as well as U.S. Bureau of Labor Statistics revisions to the previous 18 months, average monthly job gains have fallen from about 240,000 (April 2023–March 2024) to 135,000 (April 2024–August 2024). The impact of the slowing labor market was also expressed in language within the official Fed statement, adding the words, “supporting maximum employment,” ahead of, “returning inflation to its 2% objective.” 
   
• Catching up and recalibration. We also view this decision as perhaps a “catch-up” rate cut, making up for what the Fed might now view as a missed opportunity back in July. During his post-meeting press conference, Federal Reserve Chair Jay Powell used the term “recalibration” several times with comments, “the recalibration of our policy stance will help maintain the strength of our economy and the labor market,” and, “recalibrating our policy stance from where we had it a year ago when inflation was high and unemployment low and to a place that’s more appropriate given where we are now.” In addition, Chair Powell made the subtle admission that had the committee known the results of the yet to be released July employment report as of the July meeting, the Fed “might well have cut” at that time. 
   
• Fed dot plot revisions reflect change in dual mandate emphasis. Fed members also materially revised the Federal Open Market Committee Assessment of Appropriate Monetary Policy, more commonly known as the dot plot, to reflect a dramatic shift in emphasis from the previous June survey. Specifically, median expectations of the 19 voting members fell to a year-ending 2024 fed funds rate of 4.4% from 5.1% in the June 2024 dot plot, and to 3.4% to conclude 2025 from 4.1%. This new dot profile represents, in our view, the Fed’s change in priority regarding its dual mandate from fighting inflation to maximizing employment.   
   
• Changes to our fed funds rate forecasts for 2024 and 2025. We are adjusting our fed funds forecasts to reflect two more quarter-point fed funds rate cuts in November and December of this year, thereby concluding 2024 with a target range of 4.25%–4.50%, followed by four more quarter-point reductions in 2025 to finish next year with a target range of 3.25%–3.50%. We continue to maintain our target forecast for the 10-year U.S. Treasury yield of 3.75%. This reflects a narrowing but still inverted three-month to 10-year Treasury yield curve to end 2024, en route to returning to an upward slope in 2025. 
   
• We continue to expect a soft landing for the U.S. economy as the Fed further acts in the months ahead. We do not believe the U.S. economy is likely to lapse into recession in the foreseeable future, and we maintain our forecast of cumulative gross domestic product growth of 2% for CY 2024. This forecast is dependent upon the Fed continuing to reduce the fed funds rate toward an upper bound of approximately 3.50% in the year ahead to help prevent real weakness in the labor markets.

In summary, we view the current and evolving interest rate environment as being most favorable in the fixed income markets for intermediate-term, investment-grade bonds, allowing investors to lock in yields for longer time frames while mitigating short-term reinvestment risk and longer-term, duration-based price risk. We also see the beginning of this easing cycle by the Fed as constructive in helping to ensure a soft landing for the economy and positive economic growth conducive to rising corporate earnings in the year ahead. We therefore maintain our price targets on the S&P 500® of 5,800 for year-end 2024 and 6,300 for year-end 2025.   

Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be appropriate for all investors.

Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index. 

Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.

Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.

Growth stocks typically are particularly sensitive to market movements and may involve larger price swings because their market prices tend to reflect future expectations. Growth stocks as a group may be out of favor and underperform the overall equity market for a long period of time, for example, while the market favors “value” stocks. Value investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that an undervalued stock is actually appropriately priced. 

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The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs, or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.

Comments and general market-related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions. 

The federal funds rate refers to the target interest rate range at which commercial banks borrow and lend their excess reserves to each other overnight, which is set by the Federal Open Market Committee.

The 10-Year U.S. Treasury bond is a U.S. Treasury debt obligation that has a maturity of 10 years.

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