United States

Federal Reserve cuts rates, citing outlook

INSIGHT ARTICLE  | 

Citing uncertainty regarding the global economic outlook, the Federal Reserve Open Markets Committee (FOMC) cut the target range for the Federal Funds rate by 0.25% to 1.75%-2.0% at their on Sept. 18 meeting. The committee noted the labor market remains strong and economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. However, business fixed investment and exports have weakened.

This was the second rate cut this year, a notable pivot for the Central Bank, which raised rates four times in 2018 and planned to be “patient” on rate moves as recently as March. Also notable was the degree of dissent on both sides of the decision. Two regional presidents voted to leave rates unchanged, while St. Louis Fed president James Bullard voted for a sharper 0.50% cut.

The published statement indicated that the committee will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. In his press conference, Chairman Jerome Powell said the Fed was prepared to act aggressively if the economy weakened.

The conundrum for the Fed is that the recent slowdown in global economic activity has largely been attributed to uncertainties regarding trade policy, which may not be ameliorated by rate cuts.

Looking forward, the median Fed official expects rates to stay at the current level through the end of the year, although seven of 17 expect another rate cut. As of Sept. 20, market expectations based on Fed Funds futures, were a 48% probability of one more cuts and a 15% chance of two cuts* by December.

* Source: CME Group FedWatch Tool; CMEGroup.com

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