Fed cuts rates again

There is uncertainty on whether the Fed will cut again this year, with the “dot” forecast showing divergence among committee members

Ruth Saldanha 18 September, 2019 | 2:13PM

U.S. Fed's Powell

The U.S. Federal Reserve lowered its main interest rate for a second time this year, to a range of 1.75% to 2%, in light of “global developments for the economic outlook as well as muted inflation pressures”.

“Although household spending has been rising at a strong pace, business fixed investment and exports have weakened,’’ the Federal Open Market Committee said in a statement.

In terms of the future, continued growth and strong highering are the “most likely outcomes”, however, the FOMC did say that uncertainties remain and “it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

Five officials wanted to keep rates unchanged, while five saw a quarter point as appropriate this year and seven wanted a further half point cut.

“If a central bank can seems a bit hawkish on the very day they announce a rate cut, the Fed may have managed to do just that, in part due to the divisions among FOMC members about what lies ahead,” said CIBC Capital Markets’ Avery Shenfeld in a note.

He pointed out that the "dot" forecast doesn't have any further cuts this year or next, but he suspects that more of the hawks are among regional presidents who don't always vote.

“We'll therefore stick to our call for one more cut this year, and then a pause through 2020. There were two dissents in favour of no cut, and one for a 50 bp move. There were no meaningful changes in growth or inflation forecasts, but clearly, there's still a lot of uncertainty surround that path, and in the policy assumptions on trade etc. that go with it,” he said.

RBC Senior Economist Josh Nye said that today’s cut was widely expected as the Fed continues its “mid-cycle” policy adjustment. “The key question is how much further that adjustment, framed as insurance against risks from trade tensions and slowing global growth, will go,” he said in a note, pointing out that the clearest indication should come from the dot plot—it shows a median of no further cuts (or hikes) through the end of next year, but that masks significant divergence among committee members.

“Our forecast assumes the Fed will lower rates once more this year. Whether the Fed makes that additional move will depend on how the balance of risks around the economic outlook evolves into year end. Geopolitical risk has gone both ways recently, with the US and China restarting trade talks but tensions in the Middle East rising and Brexit no closer to being resolved. Domestically, more reports like yesterday’s IP numbers (manufacturing +0.5% in August) would help alleviate concerns about the health of the US industrial sector, with the key worry being that weakness there spills over into the broader economy. More clarity on these issues would help the divided Fed reach a consensus,” Nye said.

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Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca