Fed Cuts Rates as Expected … Three and Done or More to Come?

Key Points

  • The rate cut was widely expected, but the statement had a more hawkish tone than some had hoped for.

  • Changes to the FOMC statement were focused on both the positives (labor market and consumer spending) and the negatives (trade uncertainty and the related weakness in business investment).

  • Historically, three rate cuts followed by less than two additional cuts (or pauses) have rewarded stocks more than those followed by at least two more cuts.

As expected, the Federal Open Market Committee (FOMC) lowered the federal funds rate by 25 basis points to a range of 1.5% to 1.75%; while hinting it may be in pause mode in the near-term. The committee also lowered the interest rate on excess reserves (IOER) by 25 basis points. As was the case with the prior two rate cuts, both Kansas City Fed President Esther George and Boston Fed President Eric Rosengren dissented—preferring to keep rates unchanged. There was no release of a new set of economic forecasts or rate projections at this meeting, so there is no transparency with regard to how many non-voters on the FOMC felt a rate cut was justified.

Specifically, the FOMC statement no longer contains the pledge to “act as appropriate to sustain the expansion,” while adding a promise to monitor data as it “assesses the appropriate path of the target range for the federal funds rate.” As a basis for cutting rates for the third time this year, the statement cited the implications of trade and other global developments; noting that business fixed investment and exports “remain weak.” But it also highlighted the generally-positive condition of the expansion; with a description of the labor market as “strong,” job gains as “solid,” and household spending rising at a “strong pace.”

Federal Reserve chairman Jerome Powell has been on record saying he did not expect an extended series of rate cuts; but instead has been representing rate cuts as “insurance” for an economy wounded by tariffs, trade uncertainty and weak global growth. Although the three rate cuts this year have done nothing to ease trade uncertainty, they have been a fillip to interest-sensitive sectors of the economy, like housing; as well as providing a boost to the stock market.