As expected, on September 18, 2019, the Federal Reserve lowered the overnight Fed Funds rate by 25 basis points (bps) from a range of 2%-2.25% to 1.75%-2%. The new interest rate cut says a lot about the state of the U.S. economy and there's plenty to dissect, but here are nine quick takeaways you may want to know for now:
- The statement accompanying the move was largely unchanged, citing strength in the labor market and consumption but weakness in business investment, exports and inflation. Also lending support to the decision was “..the implications of global developments for the economic outlook… (trade war, Brexit, etc.).
- However, opinions of the 17 members of the Federal Open Market Committee (FOMC) are diverging. Two members dissented, wanting to keep rates unchanged, while another dissented and wanted to cut rates by 50 bps.
- The “dot-plot” showing where members think the Fed Funds rate will be at the end of the year has a median value of 1.875%, meaning that the Fed does not project another rate cut in 2019, nor in 2020.
- But medians are misleading, as are headlines based on them suggesting that the Fed does not project any more cuts this year. Ten members projected that rates would either remain at the level before the meeting or anticipated today’s cut as the last one. But fully seven members project another cut by the end of the year.
- Opinions about 2020 are even more dispersed: eight members see another cut, two expect rates to stay the same, six expect one hike, and one expects two hikes.
- Futures markets are putting the odds of a cut by the end of the year at 59%.
- We think more cuts in 2019 and 2020 are the most likely path.
- Chairman Powell also said that the Fed may have to resume growing its balance sheet, that is engage in more quantitative easing (QE), to help maintain liquidity in the financial system which has recently come under stress.
- Lower rates should help support the economy against a slowing labor market and a contracting manufacturing sector (and provide “insurance” against a continued trade war) but they can take as long as a year to have full effect.
The door remains open to another tax cut this year. How trade disputes with China and other key factors play out will determine if that comes to pass.
I recently discussed many of the signs pointing to a 2020 recession in our "Take Control of Tomorrow" webinar. Watch it on demand if you'd like to get those insights along with tips for recession preparedness.
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