Fed Delivers First 25bps Rate Cut in More than a Decade
After more than a decade the Fed is back in the rate-cutting business, delivering a 25bps cut to the federal funds rate that was largely expected. The new range for fed funds is 2.00% - 2.25% with interest on excess reserves moving down a full 25bps to 2.10% from 2.35%. As the statement outlined, cross-currents remain in the global economy and uncertainty over Brexit and trade negotiations continues to hamper global confidence. Those global headwinds, combined with a docile inflation picture, gave the Fed enough reason to cut rates for the first time in more than ten years despite a domestic economy that is still operating well. With the Powell press conference still to come, the statement made it clear that additional rate cuts could come if the clouds of uncertainty remain and inflation fails to climb to the 2% benchmark and economic growth remains moderate. The result was a rate decision and forward guidance that largely met the market’s dovish expectations.
While the rate decision was nearly a foregone conclusion, the real drama in today’s decision was whether the Fed would make it clear that this was a one-and-done operation, or whether they would leave the door open to additional cuts. From the statement it looks like additional cuts will be forthcoming if the global picture continues to look troubled, and if inflation and growth don’t move much above current levels. Given what we’ve learned, we see the funds rate likely to be cut again in September, and possibly in December, unless growth and/or inflation move decidedly higher from current levels. That pace of cuts would largely meet the market’s expectations.
The other question heading into today’s meeting was whether the Fed would adjust the schedule for portfolio run-off. Recall, earlier in the year the Fed set September as the date portfolio run-off would end, meaning that all returning principal would be reinvested and the portfolio would not continue to shrink. Now that the Fed has cut the funds rate it also decided to end portfolio run-off at the same time. Thus, beginning in August all returning principal will be reinvested which should provide some support to prices of both Treasury and mortgage-backed securities. It’s really not a big deal to suspend run-off two months early but it does remove a potential messaging issue that has one program removing accommodation (portfolio run-off) while rate cuts are being initiated. The vote was not unanimous as Esther George and Eric Rosengren both dissented, noting they felt the economy didn’t need the accommodation of rate cuts at this time. The full text of the statement follows:
Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.
Thomas R. Fitzgerald
Director, Strategy & Research
400 Interstate North Parkway
Atlanta, GA 30339