Fed Cuts Rates, Projects Low Rate Path, Tweaks Target Rates
by Craig Dismuke, Dudley Carter
The FOMC voted 7-3 in favor of cutting its overnight target range 25 basis points to 1.75-2.00%. St. Louis Bank President Bullard preferred to cut 50 basis points while Boston Bank President Rosengren and Kansas City Bank President George preferred not to cut. The Statement’s assessment of the economy remained generally upbeat. It was altered slightly to reflect better household spending but weaker business investment and exports. Retaining their future optionality, the Statement continued to note that they “will act as appropriate to sustain the expansion.”
In their updated Summary of Economic Projections, rate projections were revised lower across the board. However, the median projection for year-end 2019 was 1.75-2.00%, implying no expectation for further cuts this year. That being said, officials believed the rate would end 2019 at 2.25-2.50% in their June projections. Seven officials expect one further cut in 2019 while eight expect a cut by the end of 2020. By the end of 2021, Participants believe the target range will be 2.00-2.25%, down 25 basis point from the June projections. The median projection for the longer-run neutral rate held at 2.50%
Economic growth projections were tweaked minimally. Growth for full-year 2019 is now expected to be 2.2%, up from 2.1% in June’s projections. The unemployment rate is expected to end the year at 3.7%, also up 0.1% from June’s projections.
Addressing recent fluctuations for the Fed Funds effective rate beyond the target range, the Committee opted to lower the interest on excess reserve rate and the rate on overnight reverse report by 30 basis points each, to 1.80% and 1.70%, respectively. The discussion on how to manage overnight liquidity is likely to continue.
In response to the announcement, the yield curve has bear flattened with the 2-year yield up 5.5 bps from before the announcement and the 10-year yield up 2 basis points. The Dow Jones Industrial Average has dropped from down 0.2% to down 0.6% and the Dollar has risen 0.3%.
Federal Open Market Committee Official Statement
September 18, 2019
Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In 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 1-3/4 to 2 percent. This action 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. 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, with a strong labor market and inflation near its symmetric 2 percent objective.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.