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Juggling mixed signals, Fed lowers rates

Eric Compton  |  19 Sep 2019Text size  Decrease  Increase  |  
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At the conclusion of its September meeting, the Federal Open Market Committee voted to decrease its target rate range to 1.75 per cent to 2 per cent from 2 per cent 2.25 per cent.

For the third consecutive time under Chairman Jerome Powell's tenure, the vote was not unanimous, with Esther George and Eric Rosengren voting for no change to the benchmark rate.

George and Rosengren previously dissented following the July meeting, and both continue to favor holding rates steady. St. Louis Fed President James Bullard also dissented and preferred a heftier cut of 50 basis points.

The much anticipated Fed dot plot showed seven members favour one additional cut this year, five prefer keeping rates as-is, and five think rates would be more appropriate in the 2 per cent to 2.25 per cent range (at least three of these voters are non-voting).

The language in the Fed's statement highlighted the continually soft business fixed investment and lower inflation, and noted uncertainties around the future outlook. In the press conference, Powell also mentioned trade policy tensions and slowing global growth as reasons for the rate cut.

The Fed maintained language on acting "to sustain the expansion," indicating a further willingness to make "insurance" rate cuts. A big question for us was whether Jerome Powell still considered rate cuts to be "midcycle" adjustments.

Though Powell avoided directly answering the question, we got the sense the cut was more of the midcycle variety, rather than the "beginning of a lengthy cutting cycle." We still view at least one or two more cuts over the next year as the most likely outcome.

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The Fed's modest rate cut irritated US President Donald Trump, who has attacked the central bank and insisted that it slash rates more aggressively. The president immediately signalled his discontent.

"Jay Powell and the Federal Reserve Fail Again," Trump tweeted.

"No 'guts,' no sense, no vision! A terrible communicator!"

Updated economic and interest rate forecasts issued on Wednesday by the Fed show that only seven of 17 officials foresee at least one additional rate cut this year.

And at least two Fed officials expect a rate hike next year.

None of the policymakers foresee rates falling below 1.5 per cent in 2020 - a sign that the turbulence from a global slowdown and Trump's escalation of the trade war is viewed as manageable.

is an equity analyst for Morningstar.

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