- With two dissents, the FOMC cut the fed funds rate -25bp today. This does not have to be the start of a “long” series of rate cuts according to Fed Chair Powell, but some additional action is still possible.
- Lower neutral interest rate assessments, global risk, and still-too-low U.S. inflation were mentioned as key factors for cutting rates today, despite the recent stronger-than-expected GDP and jobs reports. The statement included: “[i]n light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent … uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion …” (emphasis added).
- Presidents Rosengren (Boston) and George (Kansas City) dissented in favor of no rate cut at this meeting. But some upside surprises in the recent U.S. macro data were not enough to sway other committee members. Insurance against downside risk (weak global growth & trade tensions) matters, even with a data-dependent outlook.
- The Fed ended balance-sheet runoff two months early, which is an intellectually consistent move with today’s interest rate cut (no need to tighten & ease in the same month).
- In his press conference, Chair Powell noted that uncertainty over U.S. policy had particularly mattered to the economy in recent quarters. Confidence matters. Powell called this a “mid-cycle” policy adjustment. Bubbles / risk to financial stability were not considered a reason to hold rates today.
- The liquidity-driven equity market has support from today’s Fed decision, but more will likely be needed to validate the level of easing markets had been assuming.
- As we’ve mentioned previously, U.S. corporate profits have been flat-lining (which is especially evident after the recent GDP revisions). There remains risk, as profits lead business spending (capex + employment). Cushioning this risk is an area rate cuts can help. Fortunately, U.S. job growth has remained adequate for now (eg, ADP’s report of +156,000 m/m private jobs in July).
- The issue for policymakers remains doing enough to offset the current slowing, particularly in mfg (we’re watching the U.S. mfg PMI reading closely tomorrow). The Chicago PMI fell sharply into contraction territory in July. The U.S. 3m/10yr yield curve also remains at -6 BP and the 2yr/10yr curve is +13 BP. If the Fed cuts enough in coming months to un-invert the 3m/10yr curve, the message from the 2yr/10yr metric is that economic growth can resume. But there’s more work to do. One of the key reasons financial conditions have eased recently is the expectation of additional Fed (and other central bank) cuts.
Source: Strategas
