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 1.75% ‐ 2.00%. The post-announcement reaction was mixed with risk assets underperforming and the Treasury yield curve flattening. While Chair Powell communicated a willingness to adjust policy to sustain the expansion, he was hesitant to commit to the additional rate cuts that financial markets are pricing for 2020. In addition, he did not address a permanent solution for the concerns within the short-term funding market. He continues to view recent adjustments in the context of insurance against downside risks rather than the start of a longer easing cycle, although he avoided explicitly characterizing it as a “mid-cycle adjustment”.
The September FOMC statement maintained most of the language used in July including the comment that the Fed will act as necessary in order to sustain the expansion but also noted that trade uncertainty is broadening to other sectors, specifically exports. While the Committee still expects a strong labor market and 2% inflation as the most likely outcomes, the statement maintained mentions of uncertainties in conjunction with muted inflation pressures as reasons to closely monitor the data.
The Summary of Economic Projections reflected two camps: seven participants are looking for an additional cut in 2019 while five set their projections 25bps above the current rate.
Formally, there were three dissenters at the meeting, Esther George and Eric Rosengren both preferring to keep interest rates unchanged while James Bullard preferred to cut rates by 50 bps.
The interest on excess reserves and reverse repo rate were also adjusted down by 30 bps each to help keep the Fed funds rate trading in the new range.
We can break the statement into two parts:
Summary of Economic Projections
Chair’s Press Conference
Chair Powell spent much of his time explaining the Committee’s rationale for easing monetary policy for a second time this year while also indicating that their base case of low unemployment and stable inflation remains unchanged. He continued to highlight the growing gap between the weak global growth backdrop and softening US manufacturing sector in contrast to the continued strength in the US labor market.
In general, Chair Powell showed little immediate concern for the US economic outlook. He dismissed the slowdown in payrolls growth as expected and indicated the consumer is still very strong. On the inflation side, Chair Powell continued to express the risk that inflation expectations could slide lower but also noted that realized inflation was rising closer to their target more recently.
Rather than focus on the number of additional rate cuts he expected, Chair Powell repeated the Committee’s desire to “sustain the expansion” and that they will adjust policy as appropriate to do so. While he mentioned it could be in theory better to be “proactive” as an approach to monetary policy, in reality the Committee was taking their decisions “meeting by meeting” and policy was not on a “pre-set” course.
Many reporters asked questions focused on the repo funding market and the rise in short-term lending rates experienced by financial markets this week. In general, Chair Powell dismissed these concerns as having little implication for the broader economy. He communicated that for now, they would address these funding strains using temporary open market operations such as the overnight repo operations the NY Fed has now conducted for the past two days rather than announcing more permanent solutions to address the issue.
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.