Fed Delivers Another Rate Cut But Moves Back to Patient Pause Stance
For the third time in four months the Fed delivered a 25bps cut to the federal funds rate that was largely expected. The new range for fed funds is 1.50% - 1.75% with interest on excess reserves also moving down 25bps to 1.55%. As the statement outlined, cross-currents remain in the global economy with uncertainties continuing to hinder global confidence. Those ongoing global headwinds, albeit recently lessened a bit, combined with a slowing domestic economy, and docile inflation picture gave the Fed enough room to cut rates for the third time since July. With the Powell press conference still to come, the statement intimated that with three reductions since July the Fed would like to pause and see how the cuts impact the domestic economy. The rate decision and forward guidance largely met the market’s “hawkish cut” expectation and that has short-end Treasuries rallying slightly while longer-end Treasuries are rallying with a bit more gusto, and that’s flattening the 2yr-10yr curve slightly from 19bps to 17bps.
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 the last rate cut for awhile, or whether they would leave the door open for another cut in December. From the statement it appears it will take material weakening in the domestic economy, and/or a real deterioration in the global outlook to greenlight a December rate cut. The market was pricing in 31% odds of a December cut before today’s action and that has moved down to 23% after the statement’s release. The Fed is likely to take those low expectations and patiently watch how the domestic economy evolves after 75bps in cumulative rate cuts.
The vote was not unanimous as Eric Rosengren and Esther George dissented again, noting the economy was strong enough not to need the accommodation of rate cuts. The full text of the statement follows:
Information received since the Federal Open Market Committee met in September 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 household spending has been rising at a strong pace, business fixed investment and exports remain weak. 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 1-1/2 to 1-3/4 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. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.
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; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.
Thomas R. Fitzgerald
Director, Strategy & Research
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