The Federal Reserve has lowered the fed funds rate by 25 basis points to a target range of 1.75-2.00%. This move was widely expected by the financial markets which had been pricing in a September rate cut for months. All eyes were on Fed Chair Jerome Powell’s announcement as he detailed plans to set the course for monetary policy while the U.S. economy attempts to remain strong through global economic uncertainties.
Although this was an expected move, it was met with three dissenting votes. Two voting members of the committee wanted to see interest rates remain the same, while one wanted to see interest rates cut by fifty basis points. Chairman Powell acknowledged the differing of opinions. Additionally, he opined that in this time of high uncertainty, there are multiple ways to interpret the economic data. He also said that diverse perspectives among Fed Governors is ultimately good for the board as they continue to monitor the economic landscape.
How have Chairman Powell’s comments evolved since the last meeting?
The verbiage from Powell is little changed from the previous FOMC meeting in July. Again, Powell referred to this series of cuts as a “mid-cycle adjustment,” cooling investors’ expectations for significantly more easing.
The committee decided to cut rates because of global uncertainties from trade disputes, the resulting slowing global growth, and inflation in the U.S. that has been persistently below the 2% target. This time around, Powell also added that exports and business investment have “weakened”.
Chairman Powell stopped short of promising more rate cuts in the near future. While the U.S. consumer is doing well and the unemployment rate remains near a 50-year low of 3.7%, there are still factors the Fed must monitor that could threaten the strength of the labor market and consumer confidence. Powell said the Fed “will take into account a wide range of information,” including the labor market, inflation expectations and global economic uncertainties when making its next decision.
Global economics are becoming a major headwind for the U.S. economy.
Germany is heading toward a recession, if not already in one, as its manufacturing and export heavy economy suffers from global trade headwinds. In addition, China is seeing a decrease in demand for its exports as its growth rate lags near 30-year lows. Trade tensions have been oscillating rapidly over the past few months as both the U.S. and China take a firm stance. And inflation continues to stay below 2%, with core PCE at 1.6% for the month of August.
The U.S. has not seen its growth rate fall as much as some countries in Europe and Asia, and that is a good sign. This strength has been aided by strong American consumers. On the other hand, manufacturing in the U.S. is contracting, and business investment is not reacting to lower interest rates as much as the Fed would hope. Many believe this to be a side effect of the uncertainties caused by the trade war between the U.S. and China. With many businesses unsure what the White House will do next, they appear less likely to invest or adjust supply chains when tariffs could seemingly be placed or revoked at any moment.
Presidential pressure and global central banks are forcing Powell’s hand.
The President has been pressuring the Fed to drop interest rates, most recently demanding interest rates that are near zero or even negative. This comes as the E.U. has dropped their rates further into negative territory, to -0.5%. Additionally, Japan has been at or near zero rates for over 20 years and may soon be cutting their rates even further.
Although the Fed did not set future monetary policy in stone, it did release the committee’s quarterly projections for interest rates. In the projection, seven of the 17 members see the need for one additional 25 basis point cut this year, five members see no need for intervention for the remainder of the year, and five more see interest rates going up by 25 basis points by the end of the year. By the end of 2020, the median projection was for one more rate cut.
Other takeaways from the Fed Meeting and recent events
Chairman Powell also entertained the idea of resuming “organic growth of the balance sheet.” In addition, the ‘repo’ market, where banks offer collateral such as government bonds in exchange for short-term loans, saw massive rate spikes and liquidity problems in the week preceding the Fed meeting. These shortages are worrying for some and have resulted in the New York Fed injecting $66bn into this market.
The overnight market is seen as basic plumbing to the financial sector and the Fed Funds Rate is the overnight rate between banks that the Fed works to control. These movements are reminiscent of 2007 as the housing market began to deteriorate. The Fed looking into the cause of the stress in this money market and may start freeing up some reserve cash for banks in order to prevent future volatility in overnight lending.
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