• The Fed's decision to cut interest rates by 50 bpsrather than the expected 25 bps, reflects a pre- emptive effort to increase the likelihood of a soft landing. While this aligns with market expectations,it exceeded economists' consensus estimates.

• The Federal Open Market Committee (FOMC) voted11-1 to lower the policy rate to a range of 4.75%-5.00%, with Michelle Bowman, a well-known hawk,dissenting in favour of a quarter-point cut. The lasttime it cut rates by 50 bps was in March 2020.

• Fed speak: Despite describing the economy asexpanding at a solid pace, the committee citedpotential labour market weakness as a key reason forthe larger cut. They also noted "greater confidence"that inflation is moving sustainably toward the 2.0%target. This decision came as a surprise, especially considering that core inflation remained elevated, and the Augustjobs report is better-than-expected.

• Press conference: Fed Chairman Jerome Powell defended the outsized cut, stating that "with an appropriaterecalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth andinflation moving sustainably down to 2.0%." He suggested that had the job data been available earlier, the Fed mighthave cut rate in July. Powell reiterated that the Fed is not following a preset course and will continue making decisionson a meeting-by-meeting basis. We continue to believe that incoming data may point more towards a slowdown than a recession, supporting a more gradual pace of rate cuts going forward.

• Dot plot highlights: The Fed is signalling another 50 bps of cuts this year, followed by an additional 100 bps in 2025and 50 bps more in 2026, potentially bringing the policy rate down to 2.75%-3.00%. The Fed's growth outlook remainsoptimistic, with a 2.0% annual growth forecast for 2025-2027. However, the unemployment rate is expected to rise to4.4% in both 2024 and 2025. Inflation projections have been slightly lowered for 2024 and 2025, with a possible returnto the 2.0% target by 2026 and 2027. The market, however, expects faster and deeper cuts, with policy rates possiblyreaching around 2.75%-3.00% by October 2025, as indicated by CME Group’s Fed Funds futures. The Fed has alsoonce again revised its long-run policy rate forecast slightly upward, from 2.8% to 2.9%.

• Fed policy outlook: Despite the latest Beige Book highlighting flat or declining economic activity in most regions, solidcorporate earnings, low default rates, and a stable labour market seem to counter the market’s expectations foraggressive rate cuts. However, we still anticipate the economy to decelerate, with the labour market cooling in the coming months. Coupled with a persistent disinflationary trend, this could justify two more 25 bps cuts this year. Looking ahead to 2025, uncertainty – especially with the upcoming election – remains, but we broadly align with the Fed's outlook for a further 100 bps of easing throughout the year.

• US Treasury outlook: After initially dipping, the 10-year UST yield rebounded above 3.70%, reflecting market cautionabout the Fed’s aggressive rate cuts due to concerns over renewed inflationary pressures. With yields already lowrelative to the expected terminal rate and two more 25 bps cuts likely this year, we expect the 10-year yield to end 2024 around 3.60%.

Source: Kenanga Research - 19 Sep 2024