Wall Street flat on less dovish FOMC minutes and Fed talks

·         At TTM (Q2CY24) EPS around $196 and life time high of around 5800, SPX-500 (Fut), TTM PE is now almost 30; at an extreme bubble zone

·         Overall, Fed talks, FOMC minutes, labor/job market report, and core CPI/PPI data indicate Fed may pause in Nov’24 and may cut regular 25 bps in Dec’24 rather than another jumbo 50 bps

Wall Street Futures led by DJ-30 and SPX-500 are now trading around life lifetime high (LTH) on hopes & hypes of a soft landing (after blockbuster US NFP/BLS job report) and soft core inflation reading, which may keep the Fed for at least a -25 bps rate cut in Nov’24 followed by another -25 bps in Dec’24. Also, techs helped led by Apple, Tesla and Nvidia. Stimulus-addicted Wall Street Futures also got a boost on Chinese stimulus last week, but also undercutting in the current week after a ‘disappointed’ Chinese stimulus briefing by NDRC as it becomes almost clear China is not interested in flooding the economy with stimulus like the US (helicopter money policy) and stick to limited targeted stimulus to preserve price stability and fiscal discipline.

Although overall US job data for Sep’24 may be indicating a Fed pause in Nov’24, Wall Street Futures surged after some knee-jerk negative reaction amid renewed optimism about a soft landing. In July and August, Wall Street Futures slid after a subdued/terrible US NFP job report due to the concern of a hard landing/job recession and overall economic slowdown. Although the Fed eventually cut an unusual crisis era/panic -50 bps in Sep’24 primarily based on subdued job report, Wall Street Futures initially slumped on the concern of an all-out economic recession, something which no stock market would like to see as it will eventually affect earnings/EPS despite lower borrowing costs.

Fair Valuation: SPX-500 (S&P 500)

Talking about EPS, the S&P-500 reported an EPS of $53.12 for Q2CY24 vs 47.37 (+12.14%) and 48.58 (+9.35%). The TTM EPS is now around $195.93 and at around 5800 recent LTH, the TTM PE of S&P 500 (spot) is now almost around 30, historically an extreme bubble zone amid hopes & hypes of Fed jumbo rate cuts/lower borrowing costs and Harrisnomics optimism. Against an average EPS growth of around 12% and a projected 15% CAGR, the fair PE of the range of the S&P 500 should be around 20-22-25 zones (Bearish-Neutral/fair-bullish).

S&P 500 reported an actual EPS of 47.79 in Q4CY23 and 192.43 for CY23 against 172.75 in CY22; i.e. yearly growth of around +11.39% against the long-term average growth rate of around +11.40% and an average nominal GDP growth +6.0%. Meanwhile, the Q1CY24 EPS of S&P 500 was around 47.37 vs 47.79 sequentially (-0.88%) and 48.41 yearly (-2.15%); overall subdued EPS growth may be due to higher borrowing costs, higher cost of living, lower discretionary consumer spending, and lingering geopolitical tensions. But in Q2CY24, the S&P 500 EPS grew at around +12% sequentially and +9% yearly.

At an average CAGR of around +15% for CY: 24-26, the estimated EPS would be around 221, 254, and 293. Assuming a fair PE of 22, the estimated fair value of S&P-500 would be around 4942 for CY24, 5684 for CY25, and 6536 for CY26. As the financial market usually discounts at least 12 months of EPS in advance, the fair value of SPX-500 should be around 5683 (~5700) by CY24 and 6536 (~6550) by CY25 against a recent lifetime high of around 5800 (TTM EPS almost at 30).

The SPX-500 has already scaled around 5800 new lifetime high a few days ago on hopes & hypes of dual stimulus-Fed’s monetary stimulus (10-11 QTR rate cuts cycle) and policy stability under Harris Presidency (expected)  coupled with AI/tech optimism. The market is now running much ahead of fundamentals at around TTM PE 30. Looking ahead, the S&P 500 may hover around 5800/6000-5400/5000 zones for CY24/Q1CY25, depending upon the Fed rate, Gaza/Ukraine war, and the White House policy trajectory.

On Wednesday, Fed’s Logan said:

·         A 'more gradual' path on rate cuts is likely appropriate from here

·         Upside risks to inflation mean the Fed should not rush to reduce rates

·         I continue to see a meaningful risk inflation could get stuck above the target

·         Lowering the policy rate gradually would allow time to judge how restrictive monetary policy may or may not be

·         Normalizing policy gradually also allows the Fed to 'best balance' labor market risks

·         Less restrictive policy will help avoid cooling the labor market more than necessary

·         Spending and economic growth that's stronger than forecast poses an upside risk to inflation

·         Lowering the policy rate gradually would allow time to judge how restrictive monetary policy may or may not be

·         We continue to see meaningful risk inflation could get stuck above the Fed's 2% goal

·         Supported Fed's decision to begin normalizing policy by cutting the policy rate

·         Recent trends in inflation for housing, and other core services are encouraging and expected to come down over time

·         Upside risks to inflation mean the Fed should not rush to reduce rates

·         Inflation and the labor market are within striking distance of the Fed's goals

·         Progress on inflation has been broad-based; the labor market has cooled and remains healthy

·         As the labor market has cooled, we face more risk it will cool beyond what is needed to return inflation to 2%

·         The US economy is strong and stable but there are meaningful uncertainties around the outlook

·         We remain attentive to inflation risks from supply chains, geopolitics, and port strike

·         The neutral Fed funds rate is uncertain; structural economic changes mean it may be higher than pre-pandemic

·         Unwarranted further easing in financial conditions could also push demand out of balance with supply

·         Spending, and economic growth that's stronger than forecast poses an upside risk to inflation

On Wednesday, Fed’s Daly said:

·         One or two more Fed rate cuts are likely this year

·         Fully supported half-point rate cut in September

·         Quite confident we are on the path to 2% inflation

·         We are at full employment

·         With the policy rate steady, the real rate was rising

·         The rising real rate was a recipe for overtightening and injuring the labor market

·         The rate cut was a recalibration, to the right-size rates for the economy

·         The size of the September rate cut does not say anything about the pace or size of the next cuts

·         Two or one more cut this year is what is likely

·         We will watch data, monitor labor market and inflation

·         We will make more or fewer adjustments to rates as necessary

·         I do not want to see further slowing in the labor market

·         Most firms are seeing a hybrid work situation, not a return to a 5-day-in-the-office situation

·         Not worried about reaccelerating inflation, more so on the jobs market

·         I am not worried about accelerating inflation

·         I was more worried about injuring the labor market

·         Will watch inflation data carefully

·         Little evidence that balance sheet expansion has much of a direct effect on inflation

·         We are coming near the inflation target but not satisfied, no victory declared

·         The balance sheet is coming down to more normalized levels

On Wednesday, the Sep’24 FOMC minutes show: Highlights

·         Details on the decision to trim rates by 50 bps in September take center stage

·         Substantial majority supported 50 bps cut

·         Almost all participants agreed upside risks to inflation had diminished

·         Most said downside risks to employment had increased

·         A few participants noted that a 25 bps move could signal a more predictable path of policy normalization

·         The committee gained greater confidence inflation moving sustainably toward the 2% goal

·         Risks to employment and inflation goals are now seen as roughly in balance

·         Economic activity expanding at a solid pace; job gains slowed but unemployment remains low

·         Inflation made further progress but was still somewhat elevated

·         Most participants see balanced risks to the inflation outlook

·         Some members would have preferred a 25bp cut, citing still-elevated inflation and solid growth

·         Bowman dissented, preferring a 25bp cut due to core inflation being well above the target

·         Members anticipate moving toward a more neutral policy stance over time if data evolves as expected

·         The committee will "carefully assess" data for additional rate adjustments

·         Some participants noted there had been a plausible case for a 25 basis point cut at the previous meeting, and data since then provided further evidence of sustainable progress on inflation.

·         However, some participants indicated they would have preferred a 25 basis point reduction, citing that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low.

September FOMC Minutes: Detailed highlights

Fed staff view Developments in Financial Markets and Open Market Operations:

“The manager turned first to a review of developments in financial markets. Nominal Treasury yields declined notably over the period, driven by weaker-than-expected data releases—especially the July employment report in early August—and policy communications that were seen as affirming expectations that a reduction in policy restraint would begin at this meeting. The decline in nominal yields over the period was primarily attributable to lower expected real yields, but measures of inflation compensation declined as well. Broad equity prices finished the period modestly higher, while credit spreads had come off the very tight levels seen earlier this year but were still narrow by historical standards. Overall, risky asset prices were compatible with continued economic expansion.

The manager also discussed the brief episode of elevated market volatility in early August. That episode saw some large moves in U.S. and foreign equity indexes, equity-implied volatilities, the dollar-yen exchange rate, and Treasury yields. These sharp moves appeared to be the result of a rapid unwinding of some speculative trading positions induced by unrelated events—such as the unexpectedly inflation-focused communications from the Bank of Japan (BOJ) in late July and the weaker-than-expected U.S. employment report in early August—and amplified by technical and liquidity factors. All told, the unwinding process was contained, and market functioning recovered relatively quickly.

Turning to policy expectations, the manager noted that the market-implied policy rate path shifted down materially. At the time of the September meeting, the modal path for the federal funds rate implied by options prices was consistent with about 100 basis points of cuts through year-end, compared with around 50 basis points at the time of the July meeting. The average path for the federal funds rate obtained from futures prices also shifted notably lower and remained below the options-implied modal path, likely reflecting investors' perception that risks were tilted toward more rather than fewer cuts.

In the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants, most respondents had a modal expectation of a 25 basis point cut at this meeting, though the manager also noted that, since the time of the surveys—about a week earlier—the probability of a 50 basis point cut at the September meeting implied by futures prices had increased and exceeded the implied probability of a 25 basis point cut.

The median respondent's modal path for the federal funds rate shifted down notably over the next two years, in line with the options-implied modal path, and was unchanged thereafter. Balance sheet expectations in the surveys were little changed from July. Most survey respondents did not appear to be concerned about an economic downturn in either the near or medium term; the median dealer's most likely path of the unemployment rate for the next few years was only modestly higher than that in the July survey and was roughly stable around current levels.

In international developments, many central banks in advanced foreign economies (AFEs) had begun or continued to lower policy rates during the intermeeting period, with the Bank of England (BOE) deciding to initiate its rate-cutting cycle with a 25 basis point reduction and the European Central Bank (ECB) and the Bank of Canada (BOC) delivering their second and third 25 basis point cut, respectively. The market-implied expectations for year-end policy rates fell over the period for most central banks in AFEs, although by a smaller amount than they did for the Federal Reserve, contributing to a modest decline in the trade-weighted U.S. dollar index.

The manager then turned to money markets and Desk operations. Unsecured overnight rates remained stable over the intermeeting period. In secured funding markets, rates on overnight repurchase agreements (repo) were higher than a few months earlier amid large issuance of Treasury securities and elevated demand for securities financing but were little changed, on the net, over the period. The manager discussed the interconnections between the repo and federal funds markets, underscoring the importance of monitoring a range of indicators to assess reserve conditions and the state of money markets. Looking at a range of such indicators, the manager concluded that reserves appeared to remain abundant.

Usage of the overnight reverse repurchase agreement (ON RRP) facility declined about $100 billion over the intermeeting period, helped by an increase in the net supply of Treasury bills. With net bill supply expected to decrease as a result of the September tax date before increasing again, the staff assessed that the decline in ON RRP usage might slow over the coming intermeeting period before resuming later this year. The manager also added that, with the concentration of ON RRP usage in a small number of fund complexes, there was an increased risk that idiosyncratic allocation decisions could have an outsized effect on aggregate ON RRP volumes.

By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.

Fed Staff Review of the Economic Situation:

The information available at the time of the meeting indicated that real gross domestic product (GDP) had expanded solidly so far this year. The pace of job gains continued to moderate since the beginning of the year, and the unemployment rate had moved up but remained low. Consumer price inflation was well below its year-earlier rate but remained somewhat elevated.

Consumer price inflation—as measured by the 12-month change in the price index for personal consumption expenditures (PCE)—was lower in July than it had been in March, which had followed some high month-over-month changes at the beginning of the year. Monthly changes in PCE prices since April have been smaller than those seen in the first three months of the year. On a 12-month basis, total PCE price inflation was 2.5 percent in July, and core PCE price inflation—which excludes changes in energy prices and many consumer food prices—was 2.6 percent.

In August, the 12-month change in the consumer price index (CPI) was 2.5 percent, and core CPI inflation was 3.2 percent; both measures were well below their rates from a year ago. The staff estimated, given both the CPI and producer price index data, that total PCE price inflation would be 2.2 percent over the 12 months ending in August and that core PCE price inflation would be 2.7 percent.

Recent data suggested that labor market conditions had eased further but remained solid. Over July and August, average monthly nonfarm payroll gains were less than their average second-quarter pace, the unemployment rate edged up to 4.2 percent, the labor force participation rate ticked up, and the employment-to-population ratio ticked down. The unemployment rate for African Americans moved down, while the rate for Hispanics rose, and both rates were above those for Asians and Whites.

The ratio of job vacancies to unemployment edged down to 1.1 in August, a bit below its level just before the pandemic. Job layoffs, as measured by initial claims for unemployment insurance benefits, remained low through August. Measures of nominal labor compensation continued to decelerate. Average hourly earnings for all employees rose 3.8 percent over the 12 months ending in August, and the four-quarter change in business-sector compensation per hour was 3.1 percent in the second quarter. Both measures were well below their pace from a year earlier.

Real GDP rose solidly, on balance, over the first half of the year. Real private domestic final purchases (PDFP)—which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum—posted a stronger first-half increase than GDP, and PDFP growth over the first half was only moderately slower than last year. Recent indicators for third-quarter GDP and PDFP suggested that economic growth was continuing at a solid pace, particularly for PCE and business investment in equipment and intangibles.

After growing at a tepid pace in the second quarter, real exports of goods moved down in July, led by declines in exports of autos and industrial supplies. By contrast, real imports of goods, especially of capital goods, continued to grow at a robust pace in July.

Real GDP growth in foreign economies stepped down in the second quarter, and recent economic indicators suggested economic growth abroad remained subdued. Although services activity and high-tech manufacturing had been relatively robust, overall manufacturing activity remained weak, in part due to restrictive monetary policies. Weakness in manufacturing was particularly pronounced in Canada, Germany, and Mexico. In China, indicators of domestic demand remained weak.

Inflation in economies abroad continued to abate, on the net, though developments were mixed. In the AFEs excluding Japan, 12-month headline inflation ticked down but remained above target levels due to still-high services inflation. In the emerging market economies, inflation moved sideways, with some Latin American economies still experiencing upward inflation pressures from food prices. The BOE cut its policy rate for the first time in the current cycle, while the BOC, the ECB, and the Bank of Mexico eased policy further, in part citing progress toward achieving their inflation targets. By contrast, the BOJ continued to remove monetary accommodation.

Fed Staff Review of the Financial Situation:

The market-implied path for the federal funds rate declined notably over the intermeeting period. Similarly, options on interest rate futures suggested that market participants were placing higher odds on greater policy easing by early 2025 than they had just before the July FOMC meeting. Consistent with the downward shift in the implied policy rate path, nominal Treasury yields declined significantly, on the net, with the most pronounced decreases at shorter horizons driven by reductions in both inflation compensation and real Treasury yields. Market-based measures of interest rate uncertainty in the near term rose notably, reportedly reflecting in part increased concerns among investors about downside risks to economic activity.

Broad stock price indexes increased, on the net, despite a sizable but temporary drop in early August. Yield spreads on investment- and speculative-grade corporate bonds were little changed, on the net, and remained in the bottom quintile of their respective historical distributions. The one-month option-implied volatility on the S&P 500 index ended the period roughly unchanged, on net, after a large but temporary spike in early August.

Overnight secured rates were largely unchanged, and conditions in U.S. short-term funding markets remained stable. The average usage of the ON RRP facility declined as net Treasury bill issuance increased, providing a more attractive alternative asset for money market funds.

Market-based measures of the expected paths of policy rates as well as sovereign bond yields in most AFEs fell notably, largely in response to declines in U.S. interest rates. The broad dollar index declined, with the dollar depreciating significantly against AFE currencies amid a narrowing in interest rate differentials between the U.S. economy and AFEs. Financial markets were volatile early in the intermeeting period following the weaker-than-expected U.S. employment report and the policy rate increase by the BOJ, which led to the unwinding of some speculative trading positions. However, declines in equities mostly retraced over the following weeks, and moves in foreign risky asset prices were mixed over the intermeeting period.

In domestic credit markets, borrowing costs remained elevated despite modest declines in most credit segments. Rates on 30-year conforming residential mortgages and yields on agency mortgage-backed securities (MBS) declined, on net, but continued to be elevated. Interest rates on both new credit card offers and new auto loans were little changed and remained at elevated levels. Interest rates for newly originated commercial real estate (CRE) loans on banks' books increased. Yields on an array of fixed-income securities, including investment- and speculative-grade corporate bonds and commercial mortgage-backed securities (CMBS), moved lower, generally following decreases in benchmark Treasury yields.

Financing through capital markets and nonbank lenders was readily accessible for public corporations and for large and middle-market private corporations and credit availability for leveraged loan borrowers remained solid. For smaller firms, however, credit availability remained moderately tight. Commercial and industrial loan balances at banks were little changed on the net. Credit remained generally accessible to most CRE borrowers. CRE loans at banks continued to decelerate in July and were unchanged in August. Non-agency CMBS issuance was robust in August, while agency CMBS issuance slipped to a bit below its post-pandemic average.

Credit remained available for most consumers, though credit growth showed signs of moderating. Auto lending continued to slow, while balances on credit cards increased moderately in July and August on average. In the residential mortgage market, access to credit was little changed overall and continued to be sensitive to borrowers' credit risk attributes.

Credit quality continued to be solid for large and midsize firms, home mortgage borrowers, and municipalities but kept deteriorating in other sectors. The credit quality of nonfinancial firms borrowing in the corporate bond and leveraged loan markets remained stable. Delinquency rates on loans to small businesses remained slightly above pre-pandemic levels. Credit quality in the CRE market deteriorated further, with the average delinquency rate for loans in CMBS and the share of nonperforming CRE loans at banks both rising further. Regarding household credit quality, delinquency rates on most residential mortgages remained near pre-pandemic lows. Though consumer loan delinquency rates remained above pre-pandemic levels, the pace of increases had slowed. Delinquency rates for credit cards rose moderately in the second quarter, while they were largely flat for auto loans.

Fed Staff Economic Outlook:

The staff forecast at the September meeting was for the economy to remain solid, with real GDP growth about the same as in the forecast for the July meeting but the unemployment rate a little higher. Although real GDP growth in the second quarter was stronger than the staff had expected, the forecast for economic growth in the second half of this year was marked down, largely in response to recent softer-than-expected labor market indicators. The real GDP growth forecast for 2024 as a whole was little changed, though the unemployment rate was expected to be a little higher at the end of the year than previously forecast.

Over 2025 through 2027, real GDP growth was expected to rise about in line with the staff's estimate of potential output growth. The unemployment rate was expected to remain roughly flat from 2025 through 2027. All told supply and demand in labor and product markets were forecast to be more balanced and resource utilization less tight than they had been in recent years.

The staff's inflation forecast was slightly lower than the one prepared for the previous meeting, primarily reflecting incoming data, along with the projection of a less tight economy. Both total and core PCE price inflation were expected to decline further as supply and demand in labor and product markets continued to move into better balance; by 2026, total and core inflation were expected to be 2 percent.

The staff judged that the risks around the baseline forecast for economic activity were tilted to the downside, as the recent softening in some indicators of labor market conditions could point to a greater slowing in aggregate demand growth than expected. The risks around the inflation forecast were seen as roughly balanced, reflecting both the further progress on disinflation and the effects of downside risks for economic activity on inflation. The staff continued to view the uncertainty around the baseline projection as close to the average over the past 20 years.

FOMC Participants' Views on Current Conditions and the Economic Outlook

In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2024 through 2027 and over the longer run. These projections were based on participants' assessments of appropriate monetary policy, including their projections of the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would tend to converge under appropriate monetary policy and in the absence of further shocks to the economy. The Summary of Economic Projections was released to the public after the meeting.

In their discussion of inflation developments, participants observed that inflation remained somewhat elevated, but almost all participants judged that recent monthly readings had been consistent with inflation returning sustainably to 2 percent. Some participants commented that, though food and energy prices had played an important part in the decline in the overall inflation rate, slower rates of price increases had become more evident across a broad range of goods and services. Notably, core goods prices had declined in recent months, and the rate of increase in core non-housing services prices had moved down further.

Many participants remarked that the recent inflation data were consistent with reports received from business contacts, who had indicated that their pricing power was limited or diminishing and that consumers were increasingly seeking discounts. Many participants also observed that inflation developments in the second and third quarters of 2024 suggested that the stronger-than-anticipated inflation readings in the first quarter had been only a temporary interruption of progress toward 2 percent. Participants remarked that even though the rate of increase in housing services prices had slowed, these prices were continuing to rise at an elevated rate, in contrast to many other core prices.

With regard to the outlook for inflation, almost all participants indicated they had gained greater confidence that inflation was moving sustainably toward 2 percent. Participants cited various factors that were likely to put continuing downward pressure on inflation. These included a further modest slowing in real GDP growth, in part due to the Committee's restrictive monetary policy stance; well-anchored inflation expectations; waning pricing power; increases in productivity; and a softening in world commodity prices.

Several participants noted that nominal wage growth was continuing to slow, with a few participants citing signs that it was set to decline further. These signs included lower rates of increases in cyclically sensitive wages and data indicating that job switchers were no longer receiving a wage premium over other employees. A couple of participants remarked that, with wages being a relatively large portion of business costs in the services sector, that sector's disinflation process would be particularly assisted by slower nominal wage growth.

In addition, several participants observed that, with supply and demand in the labor market roughly in balance, wage increases were unlikely to be a source of general inflation pressures shortly. About housing services prices, some participants suggested that a more rapid disinflationary trend might emerge fairly soon, reflecting the slower pace of rent increases faced by new tenants. Participants emphasized that inflation remained somewhat elevated and that they were strongly committed to returning inflation to the Committee's 2 percent objective.

Participants noted that labor market conditions had eased further in recent months and that, after being overheated in recent years, the labor market was now less tight than it had been just before the pandemic. As evidence, participants cited the slowdown in payroll employment growth and the uptick in the unemployment rate in the two employment reports received since the Committee's July meeting, lower readings on hiring and job vacancies, reduced quits and job-finding rates, and widespread reports from business contacts of less difficulty in hiring workers.

Some participants highlighted the fact that the unemployment rate had risen notably, on the net, since April 2023. Participants noted, however, that labor market conditions remained solid, as layoffs had been limited and initial claims for unemployment insurance benefits had stayed low. Some participants stressed that rather than using layoffs to lower their demand for labor, businesses had instead been taking steps such as posting fewer openings, reducing hours, or making use of attrition.

A few participants suggested that firms remained reluctant to lay off workers after having difficulty obtaining employees earlier in the post-pandemic period. Some participants remarked that the recent pace of payroll increases had fallen short of what was required to keep the unemployment rate stable on a sustained basis, assuming a constant labor force participation rate.

Many participants observed that the evaluation of labor market developments had been challenging, with increased immigration, revisions to reported payroll data, and possible changes in the underlying growth rate of productivity cited as complicating factors. Several participants emphasized the importance of continuing to use disaggregated data or information provided by business contacts as a check on readings on labor market conditions obtained from aggregate data. Participants agreed that labor market conditions were at, or close to, those consistent with the Committee's longer-run goal of maximum employment.

With regard to the outlook for the labor market, participants noted that further cooling did not appear to be needed to help bring inflation back to 2 percent. Participants indicated that in their baseline economic outlooks, which included an appropriate recalibration of the Committee's monetary policy stance, the labor market would remain solid. Participants agreed that labor market indicators merited close monitoring, with some noting that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration.

Participants observed that economic activity had continued to expand at a solid pace and highlighted resilient consumption spending. A couple of participants noted that rising real household incomes had bolstered consumption, though some cited signs of a slowing in expenditures or of strains on household budgets, including increased delinquencies in credit card and automobile loans.

A couple of participants suggested that the financial strains being experienced by low- and moderate-income households would likely imply slower consumption growth in coming periods. Various participants reported that their business contacts were optimistic about the economic outlook, though they were exercising caution in their hiring and investment decisions.

Participants noted that favorable aggregate supply developments, including productivity increases, had contributed to the recent solid expansion of economic activity, and a few participants discussed possible implications of the introduction of new technology into the workplace. Many participants emphasized that they expected that real GDP would grow at roughly its trend rate over the next few years.

Participants discussed the risks and uncertainties associated with the economic outlook. Almost all participants saw upside risks to the inflation outlook as having diminished, while downside risks to employment were seen as having increased. As a result, those participants now assessed the risks to achieving the Committee's dual-mandate goals as being roughly in balance.

A couple of participants, however, did not perceive an increased risk of a significant further weakening in labor market conditions. Several participants cited risks of a sharper-than-expected slowing in consumer spending in response to labor market cooling or to continuing strains on the budgets of low- and moderate-income households. Risks to achieving the Committee's price-stability goal had diminished significantly since the target range for the federal funds rate was last raised, and the vast majority of participants saw the risks to inflation as broadly balanced.

A couple of participants specifically noted upside inflation risks associated with geopolitical developments. In addition, some participants cited risks that progress toward the Committee's 2 percent inflation objective could be stalled by a larger-than-anticipated easing in financial conditions, stronger-than-expected consumption growth, or continued strong increases in housing services prices.

In their consideration of monetary policy at this meeting, participants noted that inflation had made further progress toward the Committee's objective but remained somewhat elevated. Almost all participants expressed greater confidence that inflation was moving sustainably toward 2 percent. Participants also observed that recent indicators suggested that economic activity had continued to expand at a solid pace, job gains had slowed, and the unemployment rate had moved up but remained low. Almost all participants judged that the risks to achieving the Committee's employment and inflation goals were roughly in balance.

In light of the progress on inflation and the balance of risks, all participants agreed that it was appropriate to ease the stance of monetary policy. Given the significant progress made since the Committee first set its target range for the federal funds rate at 5-1/4 to 5-1/2 percent, a substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points to 4-3/4 to 5 percent. These participants generally observed that such a recalibration of the stance of monetary policy would begin to bring it into better alignment with recent indicators of inflation and the labor market. They also emphasized that such a move would help sustain the strength of the economy and the labor market while continuing to promote progress on inflation, and would reflect the balance of risks.

Some participants noted that there had been a plausible case for a 25 basis point rate cut at the previous meeting and that data over the intermeeting period had provided further evidence that inflation was on a sustainable path toward 2 percent while the labor market continued to cool.

However, noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision.

Several participants noted that a 25 basis point reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved. A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization. A few participants remarked that the overall path of policy normalization, rather than the specific amount of initial easing at this meeting, would be more important in determining the degree of policy restriction.

Participants judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings.

In discussing the outlook for monetary policy, participants anticipated that if the data came in about as expected, with inflation moving down sustainably to 2 percent and the economy near maximum employment, it would likely be appropriate to move toward a more neutral stance of policy over time.

Participants emphasized that it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path.

Those who commented on the degree of restrictiveness of monetary policy observed that they believed it to be restrictive, though they expressed a range of views about the degree of restrictiveness. Participants generally remarked on the importance of communicating that the Committee's monetary policy decisions are conditional on the evolution of the economy and the implications for the economic outlook and balance of risks and therefore not on a preset course.

Several participants discussed the importance of communicating that the ongoing reduction in the Federal Reserve's balance sheet could continue for some time even as the Committee reduced its target range for the federal funds rate.

In discussing risk-management considerations that could bear on the outlook for monetary policy, almost all participants agreed that the upside risks to inflation had diminished and most remarked that the downside risks to employment had increased.

Some participants emphasized that reducing policy restraint too late or too little could risk unduly weakening economic activity and employment. A few participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully underway. Several participants remarked that reducing policy restraint too soon or too much could risk a stalling or a reversal of the progress on inflation. Some participants noted that uncertainties concerning the level of the longer-term neutral rate of interest complicated the assessment of the degree of restrictiveness of policy and, in their view, made it appropriate to reduce policy restraint gradually.”

Conclusions:

Fed Chair Powell and most also other Fed policymakers almost poured cold water on further jumbo rate cuts (-50 bps) and indicated normal 25 bps rate cuts in the coming days unless the unemployment rate unexpectedly surges (say above the 4.5% red line). Moreover, Powell indicated another 25 bps rate cut in Nov’24 may not be assured unless the unemployment rate unexpectedly jumps in September. As per some reports, Powell may have penciled the policy path slightly above the median in the Sep’24 dot-plots.

The Next Fed meeting would be on 7th November and before that Fed may have official access to only one inflation and employment situation report for September only. Thus unless there is an unusual surge in the unemployment rate or an unexpected drop in core CPI, the Fed may pause. The US average (6MRA) core inflation (CPI+PCE) may have already stalled in Q3CY24 at around +3.2%, while the 6MRA (average) unemployment rate is around 4.1% as per available data. Thus the Fed may go for a pause and cut 25 or 50 bps in Dec’24 based on actual Q3CY24 and 6MRA data and outlook thereof.

Bottom line:

The projected Fed rate cut of -50 bps by Dec’24 not be assured as US core disinflation may have stalled in Q3CY24, while unemployment remains around 4.0%; Fed may cut -25 bps in Dec’24 after pausing in Nov’24.

Market Impact:

On Thursday, Wall Street Futures were almost flat amid hopes & hypes of bigger Fed rate cuts despite less dovish Fed talks, FOMC minutes, and core CPI inflation data as the latest initial jobless claims were slightly hotter than expected.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (42500) has to sustain over 42700 for any further rally to 42900/43050-43250* and 43500/44000-44500/44800 in the coming days; otherwise sustaining below 42600/650, DJ-30 may again fall to 42400/42300-42100/42000 and 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20400 for a further rally to 20600/20700-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20350/300, NQ-100 may again fall to 20000/19750* and 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5780), now has to sustain over 5850 for any further rally to 5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5825/800, may again fall to 5725-5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2625) has to sustain over 2655 for a further rally to 2675*/2700-2725/2750 in the coming days; otherwise sustaining below 2650/2645, may again fall to 2625 and 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).