Fed Cuts, but Lowers Hopes of Further Reductions

Dan North
Dan North Chief Economist North America

Key Takeaways from the Fed Report

  • As expected the Federal Reserve lowered the Fed Funds rate by 0.25% to a range of 2.00%-2.25%. It was the first rate cut in over ten years.
  • In the statement the Fed cited concerns over “the implications of global developments for the economic outlook as well as muted inflation pressures” as reasons for cutting rates.  In addition the statement said “This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.” Similarly, in the press conference, Fed Chair Powell repeatedly emphasized the theme that the cut was “insurance” against the downside risks which could occur if global trade conditions deteriorate further, and that the economy was currently in good shape. Two Fed members dissented and wanted to leave rates unchanged, but this was mostly expected.
  • However there was also a significantly more important hawkish note. Powell characterized the cut as a “midcycle adjustment” and “not the beginning of a long series of rate cuts”. Stocks fell sharply and the dollar rose as a result since the words suggested a lower likelihood of further rate reductions than had been previously thought. However the Fed Funds futures market still sees an almost 75% chance that the Fed will cut again in September. 
  • On a more dovish note which has gained little attention, the Fed decided to stop its balance sheet reduction program now, two months before the end of September which had been the previously well-established time. Effectively the reduction represented less accommodative monetary policy, so the fact that it was stopped two months early is effectively a move towards more accommodative policy. 
  • The action and the statements were largely as expected, and match our scenario which still foresees another cut in September, followed by cuts in 2020. In addition, the Fed’s assessment of a healthy economy matches our scenario for 2019, followed by potential weakness in the beginning of 2020.