Fed Keeps Rates Unchanged For Now — Positions For Cuts in July and/or September
The Fed left rates unchanged today but moved to an easing posture that makes cuts in July and/or September a distinct possibility. While the rate decision met the consensus market view, the updated dot plot reflects a very dovish take with seven members calling for 50bps in rate cuts by year-end (although the median remained at 2.375%. Thus, Treasuries are rallying across the curve as they see a Fed seemingly poised to start cutting. While the Fed had provided a dovish surprise at each of the three prior FOMC meetings, we surmised that the only way to pull that off today would have been with a rate cut, but alas, that was a bridge too far for Powell and Co., given still decent economic and labor market results. While we await the Powell press conference, the statement did reflect increasing concern over the downward trend in inflation and continued its concern over the global slowdown and headwinds arising from the various trade-related skirmishes. The key change in the statement was the policy phrase “...will be patient” to a more forceful, “act as appropriate” leaving no doubt of the change in the Fed’s policy posture. Chair Powell first made that communication pivot in a June 4th speech and so it did not surprise us to find it in today’s statement. In summary, the modest shift towards an easing policy today allows for rate cuts as early as July.
Despite a more dovish dot plot the Fed’s economic outlook was generally the same or better than the March forecast. 2019 GDP is expected to be 2.1% (same as in March) while 2020 was bumped to 2.0% from 1.9% and 2021 remained at 1.8%. The expected unemployment rate at year-end 2019 dipped from 3.7% to 3.6% with the rate increasing to 3.7% in 2020 and 3.8% in 2021, both were 1/10th decreases from the March outlook. More importantly, the longer-run, or equilibrium, unemployment rate was cut again from 4.3% to 4.2%, acknowledging that with actual unemployment well below 4% it has largely been non-inflationary. Finally and importantly, as a nod to the declining trend in inflation and inflation expectations, the core inflation rate forecast was cut from 2.0% to 1.8% in 2019 but returning to 2.0% by 2021.
As expected, the dot plots of future fed funds rates came in for changes as well, The March forecast of a single rate hike in 2020 was removed, acknowledging that today’s 2.25%-2.50% range is the cycle high. The 2019 year-end median projection remained unchanged at 2.375% but eight of the seventeen members expect rate cuts by year-end with seven of those eight expecting 50bps in cuts. Nine members expect a rate cut in 2020 which forced the median down to 2.125% before rising back to 2.375% in 2021. Also of importance, the longer-run, or neutral, rate was cut from 2.75% to 2.50%. Powell has tried to wave-off the importance of the dot plots as it was born in a rising rate world, and as such is more unwieldy in projecting rate cuts via slowing/recessionary scenarios. That being said, the important takeaway today is that the Fed sees the hiking cycle as complete, and while they were hesitant to forecast aggressive rate cuts, there is no doubt they have shifted to an easing posture as the most likely next move. Finally, the vote was not unanimous. James Bullard voted to go ahead with a 25bps cut at this meeting. The full text of the statement follows:
Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is 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 appears to have picked up from earlier in the year, indicators of business fixed investment have 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 have declined; 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 support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely 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.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.
Thomas R. Fitzgerald
Director, Strategy & Research
400 Interstate North Parkway
Atlanta, GA 30339