Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
The Federal Open Market Committee (FOMC) cut the Fed Funds rate target range by 25 bps to 2.00% ‐ 2.25%. The news was met with some disappointment, as the market thought core members of the FOMC would advocate for more aggressive action (a view we shared). The post-announcement and more notably the reaction to Chair Powell’s press conference moved equities lower, inflation breakevens softer and the US Treasury yield curve flatter. The market reaction indicated that the decision to cut 25 bps was underwhelming despite a commitment to do more if needed and an early end to the balance sheet reduction.
Outside of the rate cut and the early end to the balance sheet, the July FOMC statement maintained most of the language used in the June statement such as the comment that the Fed will act as necessary in order to sustain the expansion. While the Committee still expects a strong labor market and 2% inflation are the most likely outcomes, the statement maintained mentions of uncertainties in conjunction with muted inflation pressures as reasons to closely monitor the data.
There were two dissenters at the meeting, Esther George and Eric Rosengren, both preferring to keep interest rates unchanged.
We can break the statement into two parts:
Chair’s Press Conference
Chair Powell spent the majority of his time explaining the Committee’s rationale for easing monetary policy. He highlighted the weak global growth backdrop and soft US manufacturing sector in contrast to the continued strength in the labor market. On the inflation side, Chair Powell continued to express concerns around inflation remaining below the Fed’s 2% PCE target and the risks that inflation expectations could slide lower and become unanchored.
The crux of Chair Powell’s case for easing was centered on the desire to take incremental steps to ease policy in the face of heightened uncertainty and protect against downside risks of weak global growth and muted inflation.
The Chair was challenged by a number of questions including if 25 bps was sufficient to address the FOMC’s concerns and if this rate cut was part of an easing cycle or a just a one-time adjustment. His responses oscillated around concepts of a “mid-cycle rate cut” or an “easing cycle”. Overall, the Chair struggled to communicate the Committee’s thinking on the policy actions today and especially on the path going forward. This was in sharp contrast to comments made by the Chair and Vice-Chair as recently as two weeks ago.
Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.