Fed cuts interest rates, but indicates a pause is ahead
The Federal Reserve approved an expected quarter-point interest rate cut Wednesday but indicated that the moves to ease policy could be nearing a pause.
In a vote widely anticipated by financial markets, the central bank’s Federal Open Market Committee lowered its benchmark funds rate by 25 basis points to a range of 1.5% to 1.75%. The rate sets what banks charge each other for overnight lending but is also tied to most forms of revolving consumer debt.
It was the third cut this year as part of what Fed Chairman Jerome Powell has characterized as a “midcycle adjustment” in a maturing economic expansion.
Along with the decrease came language pointing to a higher bar for future easing.
The FOMC removed a key clause that had appeared in post-meeting statements since June saying it was committed to “act as appropriate to sustain the expansion.” Powell had used the phase in early June to tee up the July rate cut, and it has been incorporated into the official language since.
In its place was more tempered language.
“The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate,” the statement said.
Fed Chair Jerome Powell was even clearer in a news conference, saying central bank officials “see the current stance of monetary policy as likely to remain appropriate.”
Market participants had been looking for whether the Fed might start to signal that the policy accommodation, which had come following nine rate hikes since December 2015, would be winding down. The new language suggests an increased level of data dependence rather than an ongoing intent to adjust rates lower. While market pricing had been around 100% for a cut at this meeting, traders had seen only about a 25% probability of a move at the Fed’s next meeting on Dec. 10-11, according to CME data heading into Wednesday’s decision.
In their public speeches, Powell and multiple other Fed officials have characterized the U.S. economy as strong, led by solid consumer spending but threatened by exogenous factors such as global weakness, the U.S.-China tariff war and uncertainties associated with Brexit.
Other changes to statement
The statement continued to view the labor market as one that “remains strong” and economic activity as “rising at a moderate rate.” Descriptions of virtually all other benchmarks of activity remained unchanged, though the committee made a minor tweak regarding business fixed investment and exports to note that they “remain weak.”
The decision comes the same day that the government reported GDP growth of 1.9% that, while reflecting a deceleration, was above Wall Street estimates for 1.6%. Job gains, meanwhile, have slowed in recent months but are well above the 109,000 or so that the Atlanta Fed estimates are necessary to keep the unemployment rate at the 50-year low of 3.5%.
In addition to the solid performance in the jobs market and in consumer spending, stock market averages are around new highs.
Within the Fed, there has been disagreement about whether additional cuts are needed. Regional presidents Esther George of Kansas City and Eric Rosengren of Boston again voted against a reduction, with both maintaining that the committee should have held the line at the previous rate.
President Donald Trump, on the other hand, has pushed hard for the Fed to keep cutting rates and to resume the quantitative easing program the central bank used during and after the financial crisis to stimulate the economy.
The Fed has been buying bonds again, but officials insist it is an effort to stabilize the funds rate within the target range rather than a resurrection of QE. Still, the central bank balance sheet has expanded by about $100 billion over the past month and is back above the $4 trillion mark, $3.6 trillion of which is in Treasurys and mortage-backed securities.
The expansion was due mostly to growth in Treasurys and T-bills.
Wednesday’s statement reflects the recent balance sheet expansion, noting that open market operations will continue at least into the second quarter of 2020, while term and repo operations aimed at stabilizing overnight markets will continue at least through January.