On September 18, 2024, the US Federal Reserve released the September 2024 Fed dot plot, which showed 2.5 points of total interest rate cuts by yearend 2026, including the 0.5-point rate cut the Fed announced today. This would reduce the fed funds rate target range from 5.25%-5.50% before today's meeting to 2.75%-3.00% in 2026.
Our economic newsletter projects the impact these Fed rate cuts could have on bond yields and mortgage rates.
The 19 Federal Open Market Committee ("FOMC") participants also projected PCE inflation to be 2.3% at yearend 2024 and for 2024 US GDP to grow 2.0%. The inflation projection was 30 basis points (equal to 0.3 percentage points) lower than what was shown in the June 2024 Summary of Economic Projections (the "SEP").
In addition, the FOMC participants projected slightly higher yearend 2024 unemployment of 4.4%, compared to a 4.0% projection in June. This higher unemployment projection coupled with the lower inflation projection were key factors on why the Fed cut 50 basis points rather than 25.
If the fed funds rate follows the projected path to sub-3.00% in 2026,, investors in the Vanguard VMFXX money market fund should expect their returns to follow suit.
This fixed income blog post covers key takeaways from the September 2024 Fed dot plot and the corresponding SEP:
- The medians of the September 2024 Fed dot plot project the fed funds rate to fall 100 basis points in 2024 (from the pre-meeting range of 5.25% to 5.50%), 100 basis points in 2025, and 50 basis points in 2026, for a total of 250 basis points (or 2.50 percentage points), as shown in Figure 1.
- As of September 17, 2024, many high-quality corporate bonds yielded between 5-7%, which can be locked in for 5, 10, or 20+ years. Yields of large money market funds, such as Vanguard VMFXX, vary monthly and will fall as the fed funds rate declines. Bond fund distributions also vary monthly and cannot be relied upon to deliver income the way fixed-rate individual bonds can.
- The September 2024 Fed dot plot projected 25 basis points more of total 2024-2026 Fed rate cuts than the Fed projected in June.
- As of September 9, 2024, the Fed had reduced the size of its securities holdings ("the Fed balance sheet") by $1.9 trillion since reaching a peak of $9 trillion in April 2022.
- Leading up to the September 17-18, 2024 FOMC meeting, US Treasury yields had fallen significantly in anticipation of potential rate cuts (see Figure 2b).
- We encourage investors to consider the Fed dot plot in the context of the economic projections contained in the SEP and summarized in Figure 2.
The September 2024 Fed Dot Plot
The Fed dot plot shows the projected yearend target range for the fed funds rate from each of the 19 FOMC meeting participants. Each dot represents the opinion of one FOMC participant. For example, as shown in Figure 1, seven FOMC participants projected a yearend 2024 fed funds target range of 4.50%-4.75%, and nine projected a range of 4.25% to 4.50%.
The biggest change between the September 2024 and June 2024 Fed dot plots is the amount of rate cuts in 2024. The Fed is now projecting 100 basis points (one percentage point) of total 2024 rate cuts compared to only 25 basis points projected in the June 2024 Fed dot plot.
Figure 1: September 2024 Fed Dot Plot Showing Projected Target Range of Fed Funds Rate
Source: September 18, 2024 FOMC Summary of Economic Projections and Bondsavvy calculations.
We compare the projected fed funds rate paths shown in the last four Fed dot plots in Figure 1b below.
The FOMC Press Conference September 18, 2024
On September 18, 2024, Fed Chair Jerome Powell hosted a press conference after the FOMC released its 2:00pm Eastern Time statement that it would be reducing the target range for the fed funds rate by 50 basis points, from 5.25-5.50% to 4.75%-5.00%. Figure A shows key statements he made during the press conference, which included the FOMC's views on the labor market, inflation, and the rationale for rate cuts.
Figure
A: Key Statements from the FOMC Press Conference on September 18, 2024
Image licensed from Getty Images.
One item that received less press coverage was the continued reduction in the Fed's balance sheet, or its "securities holdings." The Fed grew its balance sheet from approximately $4 trillion in February 2020 to $9 trillion in April 2022 in the wake of Covid-19. On September 9, 2024, the Fed balance sheet had fallen $1.9 trillion to $7.1 trillion.
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Summary of Last Four Fed Dot Plots
Figure 1b compares the median levels for fed funds rate cuts and the fed funds target range across the last four Fed dot plots. Countless amounts of ink were spilled on how many rate cuts there were going to be in 2024. While that is one data point, we believe the more important projection is where the Fed sees rates going longer term.
Per Figure 1b, the total amount of 2024-2026 rate cuts is similar across the most recent four Fed dot plots, ranging from 225 to 250 basis points. The only difference between December 2023 and September 2024 was a 25-basis-point difference in 2024 and 2026 rate cut amounts.
Our economic newsletter shows the impact 250 basis points of Fed rate cuts has had during recent rate-cutting cycles.
Figure 1b: Summary of Last Four Fed Dot Plots
| 2024 | 2025 | 2026 | Total Rate Cuts ('24-'26) | |
|---|---|---|---|---|
| Median Level of Rate Cuts in Given Year | ||||
| September 2024 Fed Dot Plot | -100 bps | -100 bps | -50 bps | -250 bps |
| June 2024 Fed Dot Plot | -25 bps | -100 bps | -100 bps | -225 bps |
| March 2024 Fed Dot Plot | -75 bps | -75 bps | -75 bps | -225 bps |
| December 2023 Fed Dot Plot | -75 bps | -100 bps | -75 bps | -250 bps |
| Median Yearend Fed Funds Target Range | ||||
| September 2024 Fed Dot Plot | 4.25%-4.50% | 3.25%-3.50% | 2.75%-3.00% | |
| June 2024 Fed Dot Plot | 5.00%-5.25% | 4.00%-4.25% | 3.00%-3.25% | |
| March 2024 Fed Dot Plot | 4.50%-4.75% | 3.75%-4.00% | 3.00%-3.25% | |
| December 2023 Fed Dot Plot | 4.50%-4.75% | 3.50%-3.75% | 2.75%-3.00% |
Sources: FOMC Summary of Economic Projections Reports and Bondsavvy analysis.
September 2024 Summary of Economic Projections
While the Fed dot plot often receives the most fanfare, it is driven by where FOMC participants believe the economy is and where it is heading. In connection with this, in the September 2024 SEP, the FOMC updated its projections for key economic indicators, including unemployment, inflation, and GDP growth. Figure 2 provides a summary of the projections across recent Fed SEPs.
As shown, the most important change between the June 2024 and September 2024 SEPs was higher yearend 2024 unemployment (4.4% vs. 4.0%) and lower yearend 2024 inflation (2.3% vs. 2.6%). These factors led the FOMC to cut rates 50 basis points rather than 25.
Figure 2: Median Economic Projections of FOMC Participants
| Date of Projection | 2023 | 2024 | 2025 | 2026 | Longer Run |
| Unemployment Rate | |||||
| September 2024 | NA | 4.4% | 4.4% | 4.3% | 4.2% |
| June 2024 | NA | 4.0% | 4.2% | 4.1% | 4.2% |
| March 2024 | NA | 4.0% | 4.1% | 4.0% | 4.1% |
| Dec 2023 | 3.8% | 4.1% | 4.1% | 4.1% | 4.1% |
| Sept 2023 | 3.8% | 4.1% | 4.1% | NA | 4.0% |
| PCE Inflation | |||||
| September 2024 | NA | 2.3% | 2.1% | 2.0% | 2.0% |
| June 2024 | NA | 2.6% | 2.3% | 2.0% | 2.0% |
| March 2024 | NA | 2.4% | 2.1% | 2.0% | 2.0% |
| Dec 2023 | 2.8% | 2.4% | 2.1% | 2.0% | 2.0% |
| Sept 2023 | 3.3% | 2.5% | 2.2% | NA | 2.0% |
| Change in Real GDP | |||||
| September 2024 | NA | 2.0% | 2.0% | 2.0% | 1.8% |
| June 2024 | NA | 2.1% | 2.0% | 2.0% | 1.8% |
| March 2024 | NA | 2.1% | 2.0% | 2.0% | 1.8% |
| Dec 2023 | 2.6% | 1.4% | 1.8% | 1.9% | 1.8% |
| Sept 2023 | 2.1% | 1.5% | 1.8% | NA | 1.8% |
Source: FOMC Summary of Economic Projections Reports
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How Expected Rate Cuts Have Impacted US Treasury Yields
While the US Federal Reserve does not control long-term US Treasury yields, Fed policy and expectations of Fed policy changes can have a big impact. Figure 2b compares the Effective Fed Funds Rate to the 2-year, 10-year, and 20-year US Treasury yields. Longer-term Treasury yields impact what homeowners pay for mortgages and the interest rates companies pay on their debt, resulting in significant impact to economic conditions.
Per Figure 2b, US Treasury yields began increasing in advance of the Fed's first rate increase in March 2022. As these yields increased, they converged and had been moving, generally, in similar directions. Treasury yields fell in late-2023 after reaching a peak in October 2023, but then rose again until May 2024, as inflation remained stubborn. Since May 29, 2024, in anticipation of Fed easing, there has been a significant decrease in US Treasury yields across the yield curve, with the 2-, 10-, and 20-year yields having fallen 137, 96, and 80 basis points by September 17, 2024, respectively.
Join our economic newsletter to see how future Fed rate cuts could impact Treasury yields and mortgage rates.
Figure 2b: US Treasury Yields vs. Effective Fed Funds Rate -- Jan 4, 2021 to Sept 17, 2024
Also of significance, on September 6, 2024, the 2-10-20-year yield curve was finally upward sloping, with respective yields to maturity of 3.66%, 3.72%, and 4.10%.
Impact on Recent Bondsavvy Corporate Bond Recommendations
Many investors have sat on the corporate bond investing fence due to the high recent returns offered by money market funds. The performance of Bondsavvy's 2024 investment grade corporate bond recommendations shows the clear advantage of owning individual bonds over money markets.
So far in 2024, we have recommended five new investment grade bonds and seven high yield bonds. For investment grade bonds, total returns (not annualized) for each pick exceeded 6.20% through September 13, 2024. These include (returns not annualized):
- Two July 11, 2024 recommendations that achieved returns of 7.31% and 6.24%
- Two April 4, 2024 recommendations that achieved returns of 6.99% and 7.02%
- One January 11, 2024 recommendation that achieved a 6.77% return
Annual money market returns have been in the low 5s for some time, but they do not compare to the partial-year returns of the investment grade corporate bonds we have recommended so far in 2024. Please view our corporate bond returns page to see the performance of all 129 previous Bondsavvy investment recommendations.
What the Fed Dot Plot Means for Investors
Total money market fund assets reached $6.3 trillion as of September 11, 2024 according to Investment Company Institute.
As we discuss in our Eight Reasons Not To Own Vanguard VMFXX blog
post, the VMFXX yield is highly correlated to the fed funds rate. As the fed funds rate falls, the VMFXX yield
would fall as well. In addition, since money market funds such as Vanguard VMFXX cannot achieve capital
appreciation, such investments would not benefit from an increase in bond prices associated with falling
interest rates.
Money market and bond fund distributions vary each month, and investors cannot lock in income the way they can with individual bonds. Given the Fed's 50-basis-point rate cut, we expect money market fund distributions to fall materially next month.
In our VMFXX yield blog post, we discuss how high-quality US corporate bonds have advantages to Vanguard VMFXX, including higher potential returns, lower fees, and higher credit quality. Individual corporate bonds allow investors to lock in high yields for 5, 10, or 20+ years and to benefit from capital appreciation opportunities. Neither of these key investment objectives is possible with money market funds.
Many high quality corporate bonds had YTMs between 5% to 7% in September 2024. Total return opportunities can be higher, as we show in our corporate bond returns page.
