Economic Flash

Fed Tees up July Rate Cut; Majority of Officials Believe Target Rate Will End 2020 Lower Than the Current Rate

by Craig Dismuke, Dudley Carter

The FOMC tilted decidedly dovish in today’s policy decision, seen most clearly in their future rate projections, but stopped short of cutting their overnight target rate range.

FOMC Statement

In their Official Statement, officials noted a weaker economic assessment, a weaker outlook for business investment, below-target inflation, and increased uncertainty.  Perhaps most importantly, they removed their language saying that the “Committee will be patient as it determines what future adjustments” should be made.  This change of language has previously been used as a signal for a policy change at a subsequent meeting.  As such, this Statement appears to be setting up a July rate cut.

The decision was not unanimous.  St. Louis Bank President James Bullard dissented, preferring to move forward with a rate cut at this meeting.

Summary of Economic Projections

The Summary of Economic Projections paints an even more convincing picture than the Official Statement.  There are currently eight participants, out of seventeen, who believe rates will end the year lower than the current 2.375% rate-range midpoint.  Moreover, seven participants believe the target range will be 50 basis points lower.  Another eight participants believe rates will end the year unchanged with one expecting a rate hike.  This tally highlights that today’s decision was likely very close to being a rate cut.

Further, the median projection for the target rate by year-end 2020 fell 50 basis points from 2.625% to 2.125%.  Again, seven participants believe the target rate will end next year at 1.875% while two believe it will end at 2.125%.  In aggregate, Fed officials believe rates will end next year lower than the current level.  This marks the first Summary of Economic Projections in which Fed officials have collectively signaled a lower rate expectation in a future year.  By year-end 2021, officials expect the target rate to be 2.375%.  Finally, the median expectation for the longer run neutral rate was lowered from 2.75% to 2.50%.  Implicitly, officials now believe we have already seen, or been very close to, the rate peak for this cycle.

FOMC Official Statement

June 19, 2019

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. 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 have declined; 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 support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely 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; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.

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