October 30, 2019 | 15:11
FOMC Policy Announcement — Three Cuts And You're Pause!
The FOMC cut policy rates by 25 bps for a third consecutive meeting, with the midpoint of the fed funds target range now at 1.625%. This was fully priced in. The Fed’s other rates are now 1.55% for the interest rate on excess reserves and 1.45% for the overnight reverse repo rate.
In the policy statement, the forward guidance was modified, intimating that a fourth consecutive action on December 11 (or in the immediate subsequent months) is less likely. The key phrase was: “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.” This is more circumspect than September’s guidance: “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…” The Fed has shifted from “acting” to “assessing”.
Further indicating less likelihood of another rate cut anytime soon, in the press conference, Chair Powell referred to monetary policy as now being in a “good place”.
The statement said: “This action [rate cut] supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.” Powell subsequently said that the risks to outlook have moved “in a positive direction”… i.e., the risks emanating from slowing global economic growth, trade policy developments and muted inflation pressures. And, for the Fed to cut rates a fourth time there would have to be a “material reassessment of the outlook”.
Immediately after the announcement, the market was pricing in 34% odds of another 25 bp rate move next month, with the odds more than doubling by March and topping 100% by September (not much different from before the announcement as all was pretty much as expected). After a speedy three rate cuts in four months—which exactly matches the magnitude and timing of the FOMC’s last “mid cycle adjustment” in 1998 (Powell’s words)—the market was betting that monetary policy would be shifting into a more guarded gear… and the Fed today ratified this view.
Finally, Kansas City President George and Boston’s Rosengren both dissented again in favor of no rate cuts (for the third time in a row), but St. Louis President Bullard toed the line after dissenting in favor of a 50 bp reduction last month.