Fed Cuts Fed Funds Rate by 25bps and IOER by 30bps
As expected, the Fed cut the fed funds rate 25bps and cut the Interest on Excess Reserves by 30bps in a nod to the sudden signs of stress in repo markets this week. While the rate decision met the consensus market view, the median updated dot plots does not reflect another rate cut this year or next. However, seven of seventeen members do expect another rate cut this year which speaks to the increasingly divided nature of the Fed. While we await more color from the Powell press conference, the statement mentioned strength in household spending but also tempered that by noting export and business investment weakness. The key phrase, “act as appropriate to sustain the expansion” remains which hints at an ongoing dovish lean for the balance of this year but the lack of another rate cut in the dot plot limits that dovish spin. In summary, near-term expectations were met with the rate cut but the FOMC is divided over the need for additional cuts and that might be all that could be expected given the daily changes in the trade picture and other geopolitical uncertainties.
In addition to the rate decision, the Fed updated its economic outlook which was little changed from the June forecast but 2019 GDP was upgraded from 2.1% t o 2.2% while 2020 was kept at 2.0% and 2021 at 1.9%. The unemployment rate forecast for year-end 2019 ticked up from 3.6% to 3.7% with the rate staying at 3.7% in 2020 and 3.8% in 2021, both unchanged from the June outlook. The longer-run, or equilibrium, unemployment rate was left at 4.2%. Finally, the core inflation rate remained at 1.8% in 2019, 1.9% in 2020 and 2.0% beyond, all those are unchanged from the June forecast.
As expected, the dot plots of future fed funds rates came in for changes. The 2019 year-end median projection was cut to 1.875% from June’s 2.375% but the median level does not project another rate cut this year. Seven out of seventeen members, however, did forecast another cut highlighting the increasingly divided nature of the Fed in regards to additional rate changes. The longer-run, or neutral, rate was kept at 2.50%, same as the June forecast.
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 economic scenarios. That being said, the important takeaway today is that while the Fed median doesn’t see another rate cut this year, seven of seventeen members do so that view could easily shift in October or December given the considerable uncertainty surrounding global growth, trade negotiations and other geo-political concerns. Finally, the vote was not unanimous. Eric Rosengren and Esther George dissented as they did in July while James Bullard wanted a 50bps cut. Again that signals the increasingly divided nature of the Fed. The full text of the statement follows:
Information received since the Federal Open Market Committee met in July 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 have weakened. 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 1-3/4 to 2 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.
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; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.
Thomas R. Fitzgerald
Director, Strategy & Research
400 Interstate North Parkway
Atlanta, GA 30339