Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
The Federal Open Market Committee (FOMC) cut the Fed Funds rate target range by 25 bps to 1.50% ‐ 1.75%. At the press conference, Chair Powell communicated a desire to see the expansion sustained but felt monetary policy was in a good place. The Chair also indicated that the 75 bps of cuts to date were sufficient to offset the uncertainties caused by trade and allow the Fed to be data dependent going forward. The unscheduled meeting on October 4th where the Committee convened to address stresses in funding markets was also briefly discussed. Chair Powell re-iterated the decision to continue buying Treasury bills through Q2 2020 to ensure abundant reserves.
The October FOMC statement maintained most of the language used in September. However, the committee removed the phrase to “act as appropriate to sustain the expansion” indicating they have provided sufficient insurance against trade uncertainty to date. While the Committee still expects a strong labor market and 2% inflation as the most likely outcomes, the statement maintained mentions of global developments and uncertainties in conjunction with muted inflation pressures as reasons to closely monitor the data.
There were two dissenters at the meeting, Esther George and Eric Rosengren both preferring to keep interest rates unchanged.
Committee Statement
We can break the statement into two parts:
- Economic Assessment – The Committee left the current assessment unchanged, noting the strength in the consumer and labor markets offset by business investment and exports.
- Outlook – The Committee maintained the statement that they will “continue to monitor” incoming information given elevated uncertainty and muted inflation pressure. However, the Fed feels as though they have provided sufficient accommodation to offset the uncertainty caused by the trade negotiations.
Chair’s Press Conference
Chair Powell spent much of his time explaining the Committee’s reaction going forward now that a number of insurance cuts have been executed. The Chair indicated that incoming data would need to result in a “material reassessment” in the outlook in order to serve as a sufficient catalyst for the next move in the policy rate. The early part of the discussion centered on trade developments and other uncertainties which the Chair characterized as having improved. While the tone was predominantly hawkish and focused on the positive outlook for labor markets and consumers, the Chair did suggest that the policy cuts done so far this year would remain in place for a considerable time.
In general, Chair Powell continued to show little immediate concern for the US economic outlook and indicated the consumer is still very strong. On the inflation side, Chair Powell continued to highlight the risk that inflation expectations could remain low and become anchored below the target rates. However, he suggested this would be addressed in the new policy framework but did would not elaborate on the details and suggested the framework would not be available until middle of 2020.
Chair Powell repeatedly emphasized monetary policy was in an appropriate place but emphasized the large role that trade uncertainty has played in the decisions of the Committee.
Additionally, the Chair discussed the recent volatility in repo funding markets and the Fed’s response. The Chair appeared willing to re-evaluate the liquidity issues within the banking system but without jeopardizing financial stability.
Our View:
- We expect the Fed to cut policy rates one additional time in 2019 in order to address risks to US growth which are beginning to translate into slowing domestic economic activity. With additional policy easing expected, U.S. Treasury yields across the curve will move lower as we close out the year.
- In today’s meeting, the Committee signaled they were happy with where rates were and had no intention of adjusting them in the near-term. Over the medium term, they appear to be uncomfortable committing to a more aggressive easing of policy until there are clearer signs of weakening in the service sector and labor markets. The case for the Fed to continue to ease policy should be bolstered by low inflation and inflation expectations which remains below the Fed’s 2% target.
- The Fed is conducting a monetary policy review this year, in which they appear to be considering a modification to their inflation strategy in order to better achieve their inflation objective and avoid an unwanted downward drift in inflation expectations. Although a formal change is not imminent in the next few months, the trend of Fed speakers indicates the Committee is leaning towards some type of change that would encourage more inflation and could result in an average inflation target – which would incorporate past misses in inflation more explicitly. The result would mean easier policy for longer unless realized inflation rises more materially and could also mean additional rate cuts would be justified if inflation is weakening along with softening growth prospects.