The Federal Reserve dropped its policy rate by 25 basis points on Wednesday but signalled that it is done cutting for now, pending clearer economic data.
After a two-day meeting in Washington, the Fed’s rate-setting committee made two key changes to the language of its statement on monetary policy. Instead of saying it would “act as appropriate to sustain the expansion”, it said it will “assess the appropriate path” of for rates.
The statement also said the Fed will “continue to monitor the implications of incoming information”.
The changes suggest that the Fed does not plan any immediate further action — a conclusion that sent the US dollar higher in its wake.
Adding a hawkish note to the decision, James Bullard of the St Louis Fed did not dissent in favour of an even steeper cut, as he had in September. Mr Bullard had been the leading voice of a group of Fed members arguing for more accommodation as the trade war discouraged business investment.
As they had at the Fed’s July and September meetings, Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed dissented, preferring to leave rates where they were.
The cut, and the signal that the Fed’s rate-setting committee will pause in December, come as the Fed, eager to make sure it still has room to cut when a downturn comes, carefully weighs actual measured data against the fears of what political uncertainty and a global slowdown could do to the American consumer.
Despite historically low unemployment, solid wage growth and decent household purchases this year, the Fed has now offered three rate cuts since the summer: in July, in September and now in October.
In speeches this year, Fed policymakers had explained this pre-emptive action in two ways. First, as what they called an “insurance policy” against a trade war that has been discouraging businesses from investing. Modeling by Fed economists in September showed that when businesses are uncertain about policy and don’t know whether to buy new plants or gear, it can drag over time on overall economic growth.
As the Fed met on Wednesday, a first read of third-quarter GDP growth from the Department of Commerce showed an annualised contraction in business investment of 3 per cent, its worst read since the US manufacturing recession of 2015 and 2016. Purchases by US households slowed down, though they continued to grow, at 2.9 per cent.
Mr Powell had also described this year’s cuts as a “mid-cycle adjustment,” designed to extend an expansion, rather than fight a downturn. Policymakers have suggested the 1990s as a historical precedent, when the Fed cut 75 basis points in 1995, then again in the second half of 1998. Analysts had interpreted this to mean that, after cutting a cumulative 75 basis points so far in 2019 as well, if the committee wished to cut further, it would have to explain why.
In its statement, the committee declined to suggest such an explanation.
The Fed prefers to avoid surprises. According to an analysis by the CME Group of bets placed on the Fed’s target rate, on Wednesday morning investors had pegged the likelihood of a rate cut at 100 per cent, an assumption that policymakers had allowed gently to rise toward certainty with speeches over the month of October.
Similarly, on Wednesday morning, investors believed the Fed would pause after its October cut, with bets on the Fed’s next meeting showing that investors see a 74 per cent likelihood that the rate will remain unchanged in December.