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The Federal Reserve kick kick kick starting its new rate cycle with a bold move, lowering interest rates by 50 basis points. Fed chair Jerome Powell insisting the central bank is not behind the curve despite a big rate cut. Powell indicating the rate decision should be taken as a sign of the central bank's commitment not to get behind the curve. Here to weigh in, former Federal Reserve Bank of Boston president, Eric Rosenren. Eric, thank you so much for being here. Um so do you think that the Fed was somewhat behind the curve and do you think that that half point cut was indeed the right call to kick off uh this uh rate cut cycle?

Yes, so the chair at the press conference highlighted that there was information that they got after the July meeting that probably made them think that maybe it would have been better to do the first cut in July. And that is the payroll employment has been coming in a little bit weaker uh with particularly the revisions. So the last payroll employment number was 142,000, but the previous two months had gotten significantly revised. And I think what that made clear to um many people on the committee was that they needed to start pivoting from being primarily concerned about inflation and being a little bit more concerned that they didn't allow the labor market to slow down too much. And I think the 50 basis points was in effect saying they were going to recalibrate monetary policy to reflect the current economic conditions. So inflation, uh the PCE, which is the personal consumption expenditure measure of inflation that the Fed focuses on is at two and a half percent. That's uh quite a bit down from where it was uh a year ago, and it is much lower than what the committee had expected earlier in the year. So they've gotten favorable news on inflation. Um the unemployment rate has risen up to 4.2%. And what they're saying is that they don't really want the labor market to weaken anymore than it has, that they're getting the kind of progress they were hoping for uh with inflation. And so that gives them the flexibility to start recalibrating rates. They don't need monetary policy to be nearly as tight as it was.

I'm curious, Eric, you know, we did get the dots. Uh, you know, those aren't set in stone. What does the path of cuts do you think look like from here?

So the summary of economic projections as you highlight, uh they forecast a number of variables including the Fed funds rate. Uh, they basically the median Fed funds rate was to end this year at 4.4%. Uh, that would be equivalent of getting two more 25 basis point cuts, and then another 100 basis points over the course of next year, which would get the Fed funds rate down to 3.4%. Um, in my own view, that's roughly what I think the endpoint is. The committee itself thinks that it's going to continue to lower another 50 basis points in 2026 to get down to 2.9%. But uh there's a lot of question about what the long-run Fed funds rate would be that would be consistent with getting a constant unemployment rate and a constant inflation rate. Uh, the committee is currently at 2.9. That's come up from around 2.5 uh a year ago. And I think they're probably going to end up somewhere between 3 and 3 and a half percent. So I I would say the 3.4% might be the the terminal interest rate. But that just highlights there's significant amount of easing left. Uh, if I'm right and the terminal rate would be around 3.4%, that implies another 100 150 basis points over the next year and a quarter.

You know, as someone who has sat in that room, um, and and been a part of these discussions, I'm going to ask a version of of what Josh asked of one of our guests earlier, which is how much sort of market conditions, but more than market conditions, sort of market chatter, what the market quote unquote wants. How much does that enter that room? How much was that a factor, do you think, in this bigger cut, you know, they they were sort of on the fence ahead of time. How much do you think that was a factor?

I think the real economic data gets much more weight than uh temporary financial movements. So I think they were moved more by the fact that they've got very positive inflation uh information over the last two reports and somewhat weaker labor markets. Um, I mean, the Fed is trying to influence finance and conditions. It affects the short rate, but longer rates uh are affected by what the Fed does, but what other things are occurring in the economy. So the Fed certainly takes into account financial factors and what the market's thinking, but uh normally the Fed doesn't react particularly strongly to um where the market is pushing. And we've seen over the last two years, there've been periods where the market thought that there would be very substantial cuts and they ended up being disappointed. Uh, this time they were a little surprised that it was 50 basis points. I would say it's a little bit unusual to start with 50 basis points, but I think it probably is appropriate given that ideally they probably would have done the the first cut in July.

Eric, great to have you on the show today. Thank you so much for your time.

Good talking with you.