Fed's 50 and Our Forecast

Episode Summary

Executive Summary: The episode centers on the Fed’s surprise 50 bps rate cut in September 2024, why policymakers chose a larger move, and what it signals about inflation, labor-market cooling, and future policy. The hosts conclude the cut reflects improved confidence that inflation is near target and growing concern about slower job growth, while also debating how much of the move was front-loaded due to the calendar and committee dynamics.

Main Topics: Fed’s September rate cut and why it mattered (Priority: 5/5): The panel reviews the FOMC’s decision to cut the federal funds rate by 50 basis points, noting it was larger than many economists expected and more dovish than markets had priced just before the meeting. Inflation has improved and is near target (Priority: 5/5): Discussion focused on how CPI and the Fed’s preferred PCE measure have softened enough for policymakers to feel comfortable easing, though inflation is not yet fully at 2%. Labor market cooling and the dual mandate (Priority: 5/5): The conversation emphasized slower payroll growth, a higher unemployment rate, and the Fed’s balancing of inflation control with its employment mandate. Why 50 bps instead of 25 bps (Priority: 4/5): The hosts weighed three explanations: the Fed is behind the curve, the data justify moving faster now, or internal committee views shifted enough to support a larger cut. Dot plot, neutral rate, and future path of policy (Priority: 5/5): They unpacked the updated rate projections, explaining that the Fed now expects more cuts ahead and that longer-run neutral rates are near 3%, even if the short-run neutral rate may be higher. Market effects, mortgage rates, and housing response (Priority: 4/5): They discussed how the cut and forward guidance affect Treasury yields, mortgage rates, housing activity, refinancing, and whether the move simply accelerates activity rather than changing the endpoint. Fed independence and political pressure (Priority: 4/5): The episode also covered concerns about political interference in monetary policy and why an independent central bank is viewed as crucial for inflation control and economic stability.

Key Arguments: The Fed cut by 50 bps because inflation is now close to target and the labor market has cooled enough to justify easing without abandoning its inflation goal. The larger cut was not necessarily panic; markets reacted positively, which suggests the decision was read as dovish but not recessionary. The most plausible explanations for the larger cut are that the data support faster easing now and that committee sentiment shifted enough to allow it. The Fed’s updated dot plot indicates a significantly more aggressive easing path than in June, with the median member now expecting multiple cuts ahead. The short-run neutral rate may be above the long-run neutral rate because the post-pandemic economy appears less rate-sensitive than in prior cycles. Mortgage rates and Treasuries had already priced in much of the move, so the decision should not dramatically alter the longer-run outlook for housing or growth. A stronger concern is political capture of the Fed; multiple speakers argued that allowing the president to direct monetary policy would be a serious mistake and historically inflationary. The cut may improve sentiment and reduce recession risk by signaling that the Fed is finally responding to cooling labor-market data and no longer appears behind the curve.

Data Points: Federal funds rate cut: 50 basis points - September 2024 FOMC decision lowered the target range to 4.75%-5.00%. Old federal funds rate target range: 5.25%-5.50% - Approximate level before the September 2024 cut. CPI inflation (August): 2.9% - Used as a rough guide; speakers noted PCE is typically about 50 bps lower. Fed estimated PCE inflation: 2.2% - Powell’s cited internal estimate for August PCE inflation. Inflation target: 2.0% - Fed’s formal inflation target. Unemployment rate: 4.2% - Described as still low but higher than earlier in the year. Three-month average payroll gains: 115,000 - Used to illustrate the slowing pace of hiring. Earlier three-month payroll gains: 250,000 - Approximate pace earlier in the year before slowing. Median dot-plot expectation for 2024: Two more 25 bps cuts - Updated September dot plot after the September 50 bps move. Median dot-plot expectation for 2025: About four cuts - Projected path in the updated dot plot. Long-run neutral rate: About 2.9%-3.0% - Fed’s long-run equilibrium rate estimate discussed in the episode. Mortgage applications composite index: +14.2% - Weekly MBA composite mortgage applications jumped after lower mortgage rates. Refinance applications: +24% - Main driver of the mortgage application surge. Mortgage rate: 6.14%-6.17% - Rate cited as the recent range for the 30-year fixed mortgage. Existing mortgage coupon average: About 4.0% - Described as having risen from a low around 3.2% in early 2022. Leading Economic Index decline streak: 33 months - Conference Board LEI has been declining since December 2021. Fed meeting dissent: 1 dissent - Michelle Bowman preferred a smaller 25 bps cut. Year-end 2024 policy level implied by Fed path: About 4.5% - If the Fed delivers two more 25 bps cuts after September. Year-end 2025 policy level implied by Fed path: About 3.5% - Dot-plot path discussed for 2025.

Pivotal Quotes: "We have both of these objectives. A year ago, all inflation." — Mark Sandy: Summarizing the Fed’s dual mandate and how its focus has shifted from inflation alone to balancing inflation and employment. "The current inflation rate is estimated that the Fed uses as a gauge is about 2.2%. The target is 2%." — Martin Worm: Explaining why the Fed felt comfortable beginning to ease policy. "If you look around the world historically, that countries with independent central banks have lower inflation." — Jerome Powell (as cited by hosts): Used in the discussion of why central bank independence matters and why political control would be risky.

Implications: Listeners should expect a slower but still easing Fed, modest near-term relief for rates and housing, and little change to the long-run outlook unless labor data deteriorate sharply. The bigger issue is whether markets or politics push policy off the Fed’s current data-driven path.