Kicking off the easing cycle with a bang: The U.S. Federal Reserve cuts interest rates by 0.5%

Richard Schmidt

September 18, 2024

Key messages

The target for the federal funds rate has been cut to 4.75-to-5%
Expect more rate cuts in the remainder of 2024, 2025 and 2026.
Risks to achieving the Fed’s dual mandate of maximum employment and 2% inflation are now in balance.

For the first time since 2020, the Federal Open Market Committee (Fed) has cut its target for the federal funds rate.

The target is coming off a 23-year high after being cut by 0.5% to 4.75-to-5%. While a rate cut was widely anticipated, the magnitude of the cut was not. Interestingly, the decision was not unanimous, as one voting member preferred a more conservative 0.25% cut. Perhaps the bigger cut is to make up for what some believe to be a late start.

The Fed is now more mindful of the other half of its dual mandate of 2% long term inflation and maximum employment. “The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” said the Fed as the latest data suggests inflation and job gains have slowed while unemployment has creeped up.

Expect more to come

The Fed has accelerated rate cut expectations. In this month’s Summary of Economic Projections, the Fed has cut the median federal funds rate to 4.4% for 2024 (down from 5.1% in the June projections), 3.4% for 2025 (down from 4.1%), before settling at 2.9% in 2026 (down from 3.1%). This would suggest another 0.5% worth of cuts for the remainder of the year, 1% of cuts for 2025 and another 0.5% in 2026. This is broadly in line with our expectations.

Growth remains solid, inflation continues to slow and employment softens in the U.S.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” said the Fed. Its latest projections remain mostly unchanged since June—it broadly expects 2% growth in 2024, 2025, 2026 and 2027, before settling around 1.8% longer term.

Inflation expectations have been revised down, but that did not change when the Fed expects to reach it’s 2% target, in 2026. Conversely, expectations for unemployment have been revised higher to 4.4% for 2024 (up from 4%), 4.4% for 2025 (up from 4.2%) and 4.3% for 2026 (up from 4.1%). According to the Fed, “the unemployment rate has moved up but remains low.”

Views on the current environment

In client portfolios with a tactical asset allocation overlay, we shifted to an underweight position in equites relative to fixed income and cash earlier in the summer. We took the opportunity to enter a more defensive stance given the perceived disconnect between strong stock markets and a softening global economy.

On the fixed income side, as we expect rates to continue to come down in the short term, there is an opportunity to add value with duration exposure (more interest rate sensitivity) on the front-end of the Canadian bond yield curve. At this time, we remain of convinced that short-term yields will continue to fall in absolute terms and relative to long-term yields.

Over the longer term, we remain firmly anchored in our long-term strategic asset allocation process to position portfolios through uncertainties and market volatility. Read more about our short- and long-term portfolio considerations here.

The next Fed rate announcement is scheduled for November 7^th, shortly after the U.S. Presential election.

Richard Schmidt

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

View legal footnotes

Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer; their values change frequently, and past performance may not be repeated.

This publication is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this document, including information relating to interest rates, market conditions, tax rules, and other investment factors, are subject to change without notice, and The Bank of Nova Scotia is not responsible to update this information. All third-party sources are believed to be accurate and reliable as of the date of publication, and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information. This publication may contain forward-looking statements based on current expectations and projections about future general economic factors. Forward-looking statements are subject to inherent risks and uncertainties which may be unforeseeable and such expectations and projections may be incorrect in the future. Forward-looking statements are not guarantees of future performance and you should avoid placing undue reliance upon them. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of The Bank of Nova Scotia.

To the extent this publication contains information or data obtained from third party sources, it is believed to be accurate and reliable as of the date of publication, but Scotia Global Asset Management does not guarantee its accuracy or reliability.

Scotia Global Asset Management is a business name used by 1832 Asset Management L.P., a limited partnership, the general partner of which is wholly owned by Scotiabank.

Scotiabank® includes The Bank of Nova Scotia and its subsidiaries and affiliates, including 1832 Asset Management L.P. and Scotia Securities Inc.

ScotiaFunds® are managed by Scotia Global Asset Management. ScotiaFunds are available through Scotia Securities Inc. and from other dealers and advisors. Scotia Securities Inc. is wholly owned by The Bank of Nova Scotia and is a member of the Canadian Investment Regulatory Organization.

® Registered trademarks of The Bank of Nova Scotia, used under licence.