For the first time in over four years, the US Federal Reserve (Fed) lowered the target range for the federal funds rate. The range was decreased by 50 basis points (bps) to 4.75-5.0%.

In the Federal Open Market Committee (FOMC) statement, the Fed acknowledged that economic activity continues to expand at a solid pace. The FOMC confirms job gains have slowed, inflation is progressing towards the target rate of 2% and the unemployment rate remains low. All positive signs.

CIBC Capital Markets says the Fed leaped into its easing cycle today, perhaps making up for a bit of a late start. The Bank of Canada announced its first rate cut in June. “Today the Fed gave the market what it wanted” says CIBC Capital Markets. “This is a defensive move which forecasts see as a starting point on a path that will keep the economy growing at 2% and allows the jobless rate to level off at 4.4% which is only slightly higher than the prior forecast.” As we look forward, the Fed expects the federal funds rate to reach 4.4% by the end of this year, 3.4% by the end of 2025 and 2.9% by 2026. “The 2025 expectation is essentially in line with our forecast” says CIBC Capital Markets. “However, unless fiscal policy tightens after the US presidential election in November, further cuts in 2026 might not be a sure bet.” For the remainder of the year, investors should expect another 50 bps rate cut in November and a 25 bps cut in December.

Diana Li, Associate Portfolio Manager, Global Fixed Income at CIBC Asset Management says “the initial reaction from markets was dovish. Rate-based markets including bonds and other fixed income securities initially rallied and the US dollar value declined after the announcement. However, markets are now starting to settle after the initial reaction and markets continue to price in more rate cuts throughout the end of the year.”

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