Khan Capital | September 2024
Key Takeaways
- The Fed cut rates by 50bp to 4.75-5.00%, the first reduction since March 2020 and the largest opening cut to an easing cycle since 2007, with Governor Bowman dissenting in favour of 25bp in the first governor dissent since 2005.
- The cut was driven by the labour market: unemployment rose from 3.4% to 4.2%, triggering the Sahm Rule recession indicator, while core PCE inflation had declined to approximately 2.7%, providing sufficient cover for the Committee to shift focus to the employment mandate.
- The September dot plot projected 100bp of total cuts by year-end 2024 and an additional 100bp in 2025, representing a fundamental repricing of the “higher for longer” narrative that had dominated markets for 18 months.
- The global easing cycle has synchronised, with approximately 70% of central banks now cutting rates, creating a coordinated monetary tailwind for growth and risk assets alongside a weakening dollar.
- Rate-sensitive sectors (REITs, utilities, homebuilders, small-caps), fixed income, gold, and international equities are positioned as the primary beneficiaries of the pivot, while the soft landing base case remains plausible but should not be treated as certain.
On 18 September 2024, the Federal Reserve cut the federal funds rate by 50 basis points to 4.75-5.00%, the first rate reduction since the emergency cuts of March 2020 and the beginning of the most anticipated easing cycle in a generation. The 50-basis-point move was a surprise: market pricing and economist consensus had been split between 25bp and 50bp, with the larger cut ultimately reflecting Chair Powell’s determination to begin the easing cycle with a decisive signal that the Fed’s focus had shifted from inflation-fighting to employment-protection.
The vote was not unanimous. Governor Michelle Bowman dissented in favour of a 25-basis-point cut, the first governor dissent since 2005 and only the second since 2002. The dissent underscored the genuine intellectual tension within the Committee: was 50bp a prudent insurance cut against a labour market that was showing early signs of weakness, or was it an unnecessarily aggressive move that risked reigniting inflation expectations?
Why 50: The Labour Market Argument
Powell’s press conference made clear that the 50-basis-point cut was driven primarily by the employment side of the dual mandate. The unemployment rate had risen from a cycle low of 3.4% in April 2023 to 4.2% by August 2024, triggering the Sahm Rule (a historically reliable recession indicator based on the pace of unemployment rate increase). Non-farm payrolls, while still positive, had decelerated from an average of approximately 250,000 per month in early 2024 to closer to 150,000. The ratio of job openings to unemployed workers, which had peaked above 2.0 in early 2022, had normalised to approximately 1.1, suggesting that the labour market’s excess tightness had been largely eliminated.
Powell framed the 50bp cut as a “recalibration” rather than a response to an emergency. The logic was straightforward: with inflation having declined substantially from its 2022 peak (core PCE at approximately 2.7%, down from 5.6%), and with the labour market cooling more rapidly than the Committee had anticipated, maintaining the fed funds rate at 5.25-5.50% risked over-tightening into a labour market that no longer needed restrictive policy. The 50bp cut was designed to front-load the easing, reducing the risk that the Fed would fall behind the curve on employment the same way it had fallen behind the curve on inflation in 2021-2022.
The Inflation Backdrop: Progress, Not Victory
The inflation picture provided the necessary, if not sufficient, condition for the cut. Core PCE had declined from its June 2022 peak of approximately 5.6% to approximately 2.7% by August 2024. The deceleration had been driven by normalising supply chains, falling goods prices, and gradually declining shelter inflation (though the latter remained stubbornly elevated). The progress was genuine but incomplete: at 2.7%, core inflation remained well above the Fed’s 2% target, and the “last mile” of the inflation fight, bringing core from the mid-2s to 2.0%, was proving more difficult than the earlier descent.
Powell acknowledged the tension explicitly, noting that the Committee had gained “greater confidence that inflation is moving sustainably toward 2 percent” but was not declaring victory. The decision to cut by 50bp rather than 25bp was, in effect, a statement that the risks to the employment mandate had risen to a level that justified accepting some near-term inflation risk in exchange for protecting the labour market.
September Summary of Economic Projections
| Metric | Pre-Cut Level | Year-End 2024 (Projected) | Year-End 2025 (Projected) |
|---|---|---|---|
| Fed Funds Rate | 5.25-5.50% | 4.25-4.50% (100bp total cuts) | 3.25-3.50% (200bp total cuts) |
| Unemployment Rate | 4.2% | 4.4% | 4.4% |
| Core PCE Inflation | ~2.7% | 2.6% | 2.2% |
| GDP Growth | 3.0% (Q2 annualised) | 2.0% | 2.0% |
| Terminal Rate | n/a | n/a | 2.9% (reached 2026) |
The Market Response: Relief Rally with Questions
The initial market reaction was positive but nuanced. The S&P 500 rallied modestly, with the gains broadening beyond mega-cap tech into rate-sensitive sectors: real estate, utilities, small-caps, and homebuilders. The 2-year Treasury yield fell below 3.6%, its lowest level since September 2022. Gold rallied. The dollar weakened.
The market’s interpretation was cautiously optimistic: the Fed had begun cutting from a position of relative economic strength (GDP growth still positive, consumer spending resilient, corporate earnings growing) rather than in response to a crisis. The “soft landing” narrative, which had been gaining credibility throughout 2024, received a significant boost. If the Fed could bring inflation down from 9% to the mid-2s while keeping the economy growing and then begin easing before the labour market deteriorated materially, it would represent the most successful monetary policy execution in decades.
But the 50bp cut also planted a seed of doubt. Large initial cuts have historically been associated with economic downturns: the Fed cut by 50bp in September 2007 (before the financial crisis) and by 50bp in January 2001 (before the dot-com recession). Powell worked to distinguish the current situation from those precedents, but the market’s memory is long, and the speed with which the rate-cutting cycle was launched raised questions about whether the Fed knew something about the economic outlook that the data had not yet revealed.
What the Market Is Misunderstanding
The dot plot is projecting a sustained easing cycle. The September Summary of Economic Projections showed the median Committee member expecting a total of 100bp in cuts by year-end 2024 and an additional 100bp in 2025, bringing the fed funds rate to approximately 3.25-3.50%. This is a significant repricing of the “higher for longer” narrative that had dominated markets for the prior 18 months. The shift from restrictive to neutral policy is expected to take approximately 12-18 months, creating a sustained tailwind for rate-sensitive assets.
The soft landing is the base case but not the only case. Markets are pricing the benign scenario in which inflation continues to decline, the labour market stabilises, and the economy achieves a soft landing. This is plausible and perhaps even probable. But the risk scenarios, a recession triggered by the lagged effects of tight policy, or a resurgence in inflation that forces the Fed to pause or reverse its cuts, are being underpriced. Position sizing may wish to reflect the possibility that the cutting cycle is interrupted or curtailed.
The global easing cycle is synchronising. The Fed’s cut followed the ECB, Bank of England, Bank of Canada, Riksbank, and Swiss National Bank, all of which had already begun easing. Approximately 70% of global central banks are now cutting rates. This synchronised easing is supportive for global growth and risk assets, but it also reflects a coordinated assessment that the global economy needs support, which is not, in itself, a bullish signal.
The election adds a layer of uncertainty. The Fed’s September cut came less than two months before the US presidential election, inviting inevitable political scrutiny. The perception of Fed independence is essential to its credibility, and any suggestion that the cut was motivated by political considerations (regardless of the actual motivation) could undermine market confidence in the institution. The incoming administration’s approach to the Fed, whether respectful of its independence or confrontational, will be a key market variable for the next four years.
Implications for Investors
Rate-sensitive assets are the immediate beneficiaries. REITs, utilities, homebuilders, and small-cap stocks, all of which were punished during the tightening cycle, may be positioned for a sustained re-rating as rates decline. The rotation from growth to value and from mega-cap to mid and small-cap, which has already begun, could have further to run if the cutting cycle proceeds as the dot plot projects.
Fixed income may offer the most attractive risk-adjusted returns in years. With the Fed now cutting into a curve that had already priced significant easing, duration exposure carries less risk than at any point since 2022. Investment-grade credit, in particular, offers attractive carry with improving credit conditions as lower rates reduce corporate borrowing costs and default risk.
The dollar may weaken as the rate differential narrows. The Fed’s cut reduces the interest rate premium that has supported dollar strength. A weaker dollar is a tailwind for international equities, commodities (which are dollar-denominated), and emerging market assets. Geographic diversification becomes more attractive as the dollar headwind fades.
Gold’s structural bull case is reinforced. Falling real interest rates are the single most important driver of gold prices. The Fed’s pivot to an easing cycle, combined with central bank buying and geopolitical hedging demand, creates a powerful tailwind that the September cut has catalysed but not exhausted.
Conclusion
The Fed’s 50-basis-point cut on 18 September 2024 marks the end of the most aggressive tightening cycle in four decades and the beginning of an easing cycle that the dot plot projects will bring rates down by 200 basis points over the next 12-18 months. The decision to begin with a jumbo cut reflects the Fed’s assessment that the balance of risks has shifted decisively from inflation to employment, and its determination not to repeat the mistake of moving too slowly. For investors, the pivot represents the most significant shift in the monetary policy backdrop since March 2022, with implications for every asset class, every sector rotation, and every portfolio construction decision. The soft landing remains the most probable outcome, but the fog of monetary policy has not fully cleared, and the path from here to neutral will be neither straight nor without surprises.
Sources: Federal Reserve FOMC Statement, CNBC, J.P. Morgan, PIMCO, The Conference Board
Related Reading
For background on how the Fed reached its terminal rate, see our earlier analysis: Fed Funds at 5.5%: The End of the Hiking Cycle? The economic resilience that enabled this cut is covered in Soft Landing in Sight? The US Economy Defies Recession Calls. For how this easing cycle evolved, see our subsequent coverage: Fed Signals Fewer Cuts in 2025 and Fed Pauses Rate Cuts: Higher for Longer Returns.
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