Fed’s step towards neutrality

The United States’ Federal Reserve’s decision to cut interest rates by 50 basis points is a clear indication it sees a path to policy neutrality, according to ANZ’s Head of G3 Economics Brian Martin, and bolsters hopes for a soft landing as inflation cools.

The Fed lowered US interest rates to a 4.75 per cent to 5.00 per cent range  at its September meeting, the first time it had lowered rates since the early pandemic era of March 2020.

Speaking to ANZ’s 5 in 5 with ANZ podcast, Martin said the size of the cut suggested the Fed may be playing catch up on easing inflation risk, having held rates at its last meeting in July.

“The forecast [the Fed has] projected for the end of this year and going into next year shows modestly lower inflation and slightly higher unemployment,” he said. “They clearly see the risks moving back into greater balance and I think they want to proceed with moving towards neutrality.”

While a cut was forecast by many, market expectations had been split between a 25 and 50-point move. The Fed rate had sat at 5.25 per cent to 5.50 per cent range since July 2023, but the September decision pointed to an extended cycle of cuts ahead, according to Martin.

"We're looking for 200 basis points of cuts, really, over the next 12 months,” he said. "And then the Fed have [flagged] another 50 basis points of cuts in 2026."

That suggest the Fed’s expectation for neutrality is somewhere between 2.75 per cent and 3 per cent, Martin said.

“Interestingly, growth forecasts are unchanged at 2 per cent," he said. "So the move of 50 basis points, I think, is underwriting the soft-landing outlook.".