FOMC Cuts to 1.50-1.75%; Mid-Cycle Adjustment Complete
by Craig Dismuke, Dudley Carter
The FOMC voted to cut its overnight target rate for a third time to a range of 1.50-1.75% but appeared to close the door to future cuts. The interest rate on excess reserves was also cut 25 bps to 1.55%. The Official Statement was changed very little, particularly as it relates to the economic assessment. The Statement continued to note moderate economic activity, solid job gains, a low unemployment rate, strong household spending, and weak business investment and exports. It also notes lower-than-target inflation.
However, the Statement was changed with regards to future policy actions. The Committee removed one key phrase in its forward-looking language, the statement that they “will act as appropriate to sustain the expansion.” This language was inserted in June as a foreshadowing, of sorts, that they could change policy at upcoming meetings. Removing the language implies the opposite, that they believe they have completed their “mid-cycle adjustment.” As such, we expect it will require a meaningful deterioration of economic or financial conditions for the Committee to entertain another rate cut.
Kansas City Bank President Esther George and Boston Bank President Eric Rosengren once again dissented to the rate cut. St. Louis Bank President Bullard did not dissent.
Markets have initially taken the news in-stride with the 10-year yield holding at 1.80%, the 2-year yield up 1.5 bps to 1.63%, and stocks up fractionally.
Fed Chair Powell will hold a press conference at 1:30 p.m. CT, at which time he is likely to discuss the intermeeting actions regarding temporary and permanent open market operations.
FOMC Official Statement
October 30, 2019
Information received since the Federal Open Market Committee met in September 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 remain weak. 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 1-1/2 to 1-3/4 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. 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.
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; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.
Implementation Note issued October 30, 2019