The Federal Reserve cut US interest rates by 25 basis points, to a range of 1.75 to 2 per cent and signalled that it could stop there despite uncertainty over trade and fierce pressure from the White House for more accommodation.
The cut, the second this year, was in line with the expectations of investors and economists, but the central bank’s projections projected a more hawkish line than markets had anticipated. The median forecast among its rate-setting committee was that rates would be at the same level at the end of 2020.
Futures data compiled by Bloomberg before the meeting showed that investors had expected two more cuts by the end of 2020.
The Fed statement drew an immediate attack from President Donald Trump, who tweeted: “Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”
The Fed left the language from its July policy statement largely unchanged. It noted that business investment and exports had weakened, but said as it had over the summer that it would “act as appropriate to sustain the expansion”.
Amid rising disagreement among the Federal Open Market Committee over changing economic conditions, there were three dissents. Jim Bullard, president of the St Louis Fed, preferred a steeper cut of 50 basis points. As in July, Esther George and Eric Rosengren voted to keep the rates unchanged.
Treasuries gave back earlier gains following the Fed’s statement. The yield on the policy-sensitive two year note, which moves inversely to its price, jumped from 1.66 per cent ahead of the announcement to 1.72 per cent. The yield on the 10-year note climbed from 1.75 per cent to 1.79 per cent.
US stocks extended losses after the statement but clawed back much of the move as Mr Powell spoke at his post-meeting press conference. The US dollar rose.
“It is a bit of a hawkish cut since you had those dissents,” said Seema Shah, a chief strategist at Principal Global Investors. “Markets may have been expecting more given what happened over the weekend with oil markets, and that is why equity markets are not reactive in a particularly positive way,” referring to the spike in oil prices since Saudi Arabia’s oil facilities were attacked.
The Fed meeting followed several days of market disruptions, as returns on overnight lending spiked as high as 10 per cent on Tuesday.
In its “implementation note” on market operations, the committee authorised the New York Fed to slightly alter its two tools for maintaining the interest rate range. The interest the Fed pays on excess reserves will drop to 1.80 per cent, rather than the 1.85 per cent that would have been expected to maintain the target policy. Similarly, the Fed will offer reverse repurchases at an offering rate of 1.70 per cent, rather than 1.75 per cent.
Analysts had expected either a more explicit repurchase facility to keep rates within target, or even increased asset purchases to increase the level of bank reserves in the system. In declining to offer either of these, the Fed signalled that it is still considering its response to the volatility in overnight lending.
Treasuries were likely to continue to sell-off, according to Peter Tchir, the head of macro strategy at Academy Securities, who predicted that the 10-year note could hit 2 per cent in the coming weeks as the Fed was likely to remain more hawkish than had been expected.
“People are overplaying how weak the economy is and how accommodative the Fed will be,” he said. “The economy is not falling off the rails, and we could have a trade deal with China.”
Since trade rhetoric heated up at the end of 2018, Fed policymakers have been open about the difficulty of finding clear signals in economic data. The US unemployment rate has continued to drop, and at 3.7 per cent, is as low as it has been since 1969.
Manufacturing production has been dropping for a year, though it recovered slightly in August. Though manufacturing represents only 11 per cent of GDP, the Fed has signalled in speeches and research that it is concerned that uncertainty over trade has been weighing on business investment.
The Fed’s hesitance to publicly signal that it was worried about a recession became a communications challenge after its July meeting, when the Fed chairman Jay Powell described a 25 basis-point cut as a “mid-cycle correction,” disappointing investors who had expected more dovish language.
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