Last week brought us a great deal of news on the U.S. economy, and the Fed met to direct the course of monetary policy. While the rate cut that was announced at the meeting was expected, investors were listening closely as Chair Jerome Powell and the rate setting committee guided investors’ expectations for interest rates in the future.
October FOMC Meeting Recap
Going into the meeting, investors were fairly certain that The Fed was going to lower the policy rate by 0.25%, and they did. The current Fed Funds Target Range is now 1.50-1.75%. There were two dissenting votes on the rate setting committee. Both Eric Rosengren of Boston and Esther George of Kansas City voted to see the rate remain unchanged. These two were both dissenters at the September FOMC Meeting as well.
When announcing the results of the meeting, the committee made some important alterations to their verbiage. These changes should give Wall Street a better sense for their decision making going forward. Powell’s favorite line during this year’s round of rate cuts had been that the Fed was going to “act as appropriate to sustain the expansion.” This phrase was removed at the most recent meeting, signaling to investors that the current round of rate cuts in this “mid-cycle adjustment” will be put on hold.
Powell also explicitly told reporters at the press conference that members of the committee “see the current stance of monetary policy as likely to remain appropriate.” Some have drawn comparisons between this round of easing and the rate cuts performed in 1995 that were implemented as insurance to a slowing economy, not necessarily because a recession was imminent.
New U.S. Economic Data Is Encouraging
Some important U.S. economic data were released last week that reinforced the Fed’s indication that they would pause rate cuts after this meeting:
On Wednesday, the Bureau of Economic Analysis reported that GDP in the third quarter rose to 1.9% year-over-year, beating Wall Street’s estimates of 1.6% by a healthy margin. This data came in just hours before the Fed’s decision to cut rates. While 2019’s averages are still below GDP from 2018, the economy is proving to be more resilient than many had expected, despite persistent global economic headwinds.
Friday saw the release of two important indicators, the October jobs report and the ISM manufacturing index. Per the jobs report, non-farm payroll employment rose by 128,000, once again beating out estimates. This was encouraging since employment took a major hit from auto manufacturing due to the GM strike and a drop in temporary census workers. Job totals from the past two months were also revised up by a total of 95,000. Unemployment ticked up to 3.6%, but this was due to more people joining the labor force.
The ISM Manufacturing Index Could Be Cause for Concern
On the other hand, the ISM manufacturing index remained below 50 and below estimates, at 48.3%. Any number below 50 signals that manufacturing is contracting, and this has been the case for three straight months. Additionally, Core PCE inflation remained below the Fed’s target of 2% and ticked down in September to 1.7%.
This round of data has been consistent with recent months’ economic trends. Manufacturing is lagging, and inflation is persistently below target. Many speculate that these numbers are down due to trade tensions and a global growth slowdown. On the bright side, global factors have not been enough to derail the U.S. economy as a whole. Employment and GDP have remained robust, and the resilient consumer in the U.S. continues to support the strength of the domestic economy.
Where are interest rates headed in the near future?
At the moment, it seems that rates will be steady for the next few months. As of this writing, the CME Group’s FedWatch tool is pricing in just a 1/8 chance that the Fed will cut rates at the December meeting. The median projection from the Fed’s economic forecast in September had the federal funds rate at 1.75-2.00% in 2020. This signals that the Fed is going to be increasingly data dependent as they analyze the effects of the loose monetary policy.
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