“It seems that’s so far away now, my own sense is that we’re not going back to that. But honestly, we’re going to find out. But it feels, it feels to me, and that the neutral rate is probably significantly higher than it was back then. How high is it? I don’t, I just don’t think we know. It’s, again, we only know it by its works.†– Jay Powell
The Federal Open Market Committee followed the forward curve and cut the Fed Funds target rate ½ point. Parts of the Treasury curve gained positive slope but 2-Year maturities and shorter remained inverted. The updated Summary of Economic Projections included a number of changes from the June meeting.
The FOMC found the confidence (September 18) that they previously lacked earlier this year to cut the target rate to a range of 4.75% to 5.0% sparking a new debate regarding motivation for the change. Chairman Powell narrated the policy action as rate “normalization†and “recalibration†from a restrictive stance to less restrictive. Markets evaluated the alternative that the change was more due to labor market weakness and increased focus to the maximum employment mandate after prolonged prioritization to price level risks. There was no change to the pace of Quantitative Tightening with the Federal Reserve balance sheet reduced to its October 2020 size.
The SEP 2024 median Fed Funds rate was lower by 0.7% previewing an additional ½ point target rate reduction in the 4th quarter. The 2025 median Fed Funds rate was reduced to 3.4% from 4.1% in June.
Other noteworthy 2024 SEP changes included unemployment finishing the year at 4.4% (previously 4.0%) and GDP Growth declined to 2.0% from 2.1%. With unemployment currently at 4.2% and already at 4.3% in July, further softening to 4.4% seems reasonable. I thought the slight decrease in SEP GDP Growth more interesting since we already have first half actuals counted and the latest Atlanta Fed GDP Now is projected at 2.9% in the 3rd quarter. Assuming the growth rates for the first 3 quarters of 2024 are known, the 4Q annualized growth rate would need to decline to just 0.9% for the lowered median SEP to be realized. This seems to indicate that the FOMC on whole expects significant economic weakening into the year end.
While the Fed meeting was the main event in the week, we also received updates on Retail Sales and Industrial Production. Retail Sales (September 17) increased 0.1% in August and 2.1% from a year ago. I am always reminded that this is a nominal number. Adjusted for CPI inflation, real Retail Sales were lower by -0.1% in August and -0.4% from the prior year.
August Industrial Production (September 17) rebounded +0.8% after declining -0.9% in July. The report from the Federal Reserve noted that, “at 103.1 percent of its 2017 average, total industrial production in August was the same as its year-earlier level.â€
To me, I see a Manufacturing sector in decline despite ongoing fiscal stimulus. I also see the labor market better described through the BLS Household survey in which there are -66k fewer people employed today than a year ago. My position in the debate behind the FOMC rate cut motivation is that both sides are right. Monetary policy throughout 2024 has been too restrictive and requires normalization. I also see amplified labor market and economic risks. Finally, I question the Fed’s impact on forward inflation amid ongoing fiscal deficits. In the first 81 days of the current quarter, U.S. national debt has increased 1.4%. The 6.5% annualized debt growth rate is just slightly below the 21st century average of 7.5%, in my opinion, structurally challenging efforts to stabilize price level.