The Final Cut … or More to Come?

Key Points

  • The Fed cut rates by the expected 25 basis points, with a split in sentiment from FOMC members; as well as three dissents.

  • The interest on excess reserves (IOER) was cut by a larger 30 basis points to address the liquidity problems in the repo market.

  • Stocks were weak and bond yields rose as the decision was seen as a bit more hawkish than what some investors had been expecting.

As expected, the Federal Open Market Committee (FOMC) cut the fed funds rate by 25 basis points to a target range of 1.75% to 2.00%; which was the second rate cut this year. They maintained their pledge to “act as appropriate to sustain the expansion.” There were three dissents: Kansas City Fed chief Esther George and Boston Fed chief Eric Rosengren dissented again, as in July, preferring to keep rates unchanged; while this meeting brought an additional dissent from St. Louis Fed chief James Bullard, who preferred a 50 basis points cut. Three dissents in a Fed decision is a first since 2016.

In terms of the “dots plot” representing individual expectations, the committee was split as to whether there will be need for additional easing. Five FOMC officials wanted to keep rates unchanged today and through the rest of this year; five saw a quarter point cut as necessary, then keeping them there for the rest of the year; and seven pushed for 50 basis points in cuts this year.

The uncertainty lies with the competing forces of the negative effects of the ongoing trade war and weak global growth, and the relative strength of the consumer side of the U.S. economy. On that note, the statement included the following: “Although household spending has been rising at a strong pace, business fixed investment and exports have weakened.”

The FOMC also released new quarterly forecasts:

  • The median estimate saw the fed funds rate holding steady after today’s move, at 1.9%; and remaining there until the end of 2020, thereafter rising to 2.1% in 2021 and 2.4% in 2022.
  • The unemployment rate was forecast to end this year at 3.7% (up 0.1% from June) and finish 2020 at that same level; while the longer-run estimate was unchanged at 4.2%.
  • They continue to forecast that inflation won’t reach their 2% target until 2021.

There were limited changes to the FOMC’s statement, which continues to signal optimism but also concern about downside risk due to “uncertainties.” The only change of note was the addition of a reference to weaker exports in the sentence that referenced weak business fixed investment.