Markets ended the week higher, with the S&P 500 briefly closing at a new record high, following the Fed’s decision to cut interest rates. With earnings season over, and a relatively light economic calendar, the Fed dominated investors’ attention.
As expected, the Fed cut rates by 0.25%, lowering the fed funds rate to a range of 3.50-3.75%. The Fed also updated its Summary Economic Projections (SEP) showing it now expects 2026 GDP growth of 2.3%, up a full 0.5% from its prior forecast of 1.8%. Core PCE inflation is now expected to end 2026 at 2.5%, down from the prior forecast of 2.6%, while the outlook for unemployment remained unchanged at 4.4%.
For the first time since 2019, three Fed members objected to the Fed’s decision with one voting for a 0.50% rate cut, while two members voted to leave rates unchanged, concerned about the potential for higher inflation.
Speaking at his post-meeting press conference, Fed Chair Jay Powell, addressed the two components of the Fed’s dual mandate- inflation and labor markets- saying, “In the near term, risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation. There is no risk-free path for policy as we navigate this tension between our employment and inflation goals.” Having cut rates by 0.75% since September, Powell described the current level as “within a broad range of estimates of its neutral value” leaving the Fed “well positioned to determine the extent and timing of additional adjustments based on the incoming data.”
Separate from its rate cut, the Fed announced a plant to begin purchasing $40B per month of short-term Treasuries, to alleviate expected pressure on money markets. The move, somewhat unexpected, was seen by some as a form of quantitative easing (QE). Powell described the move as “reserve management purchases.”
