Judgement Call

The Federal Open Market Committee will meet this week to set monetary policy. It’s widely expected that the FOMC will lower the federal funds target range by another 25 basis points, although that’s not a done deal. We know from the FOMC minutes that officials were divided in late July: “several participants favored maintaining the same target range,” while “a couple of participants indicated that they would have preferred a 50 basis point cut.” Given the mixed nature of recent economic data reports, those divisions may now be even more pronounced. The recent softening in trade tensions and efforts to spur growth abroad have reduced the amount of fear in the financial markets – it was these kind of developments that had calmed the Fed’s concerns in the spring. However, part of the market’s reduced anxiety has been due to expectations of further Fed easing.

First, let’s review what goes on at the FOMC meeting. All senior Fed officials are “participants.” That includes the five members of the Fed’s Board of Governors (there are two vacancies) and the presidents of the 12 Fed district banks. However, only FOMC members vote on monetary policy. The FOMC is made up of the governors, the New York Fed president, and four of the other district bank presidents (who rotate on and off each year). By construction, the governors and the New York Fed president will dominate. However, while views can differ and there will be some debate, the committee tries to build a consensus on its policy decision. Formal dissention is not unusual. One official voted against keeping rates steady in June and two voted against cutting rates in July.

It’s rare that we go into an FOMC without a clear expectation of the outcome. The FOMC does not like to surprise the financial markets. Late Friday, the federal funds futures market was pricing in an 80% chance of a 25-basis-point cut on September 18 (a 20% chance of no move) – not the sure thing it appeared to be a couple of weeks ago. Prior to the FOMC meeting, the New York Fed surveys primary dealers and other financial institutions. In the questionnaire, these firms are asked about their expectations for what the Fed will do, the wording of policy statement, and what Chair Powell will say in his press conference. These survey results may have some influence on what the Fed will do. The results will be made public concurrent with the release of the FOMC minutes.