Fed Cuts Rates for a 3rd Time, Done for Now?
As expected, the Federal Reserve cut interest rates by 0.25% yesterday to a range of between 1.5% and 1.75%. Market reaction was not particularly pronounced, the S&P 500 formed a four hour higher-low at 3026, followed by a gentle push beyond Tuesday’s all-time highs.
The US dollar Index retested the 98 level and was rejected from it. It’s currently trading at 97.30, showing a decline against its major trading partners.
Interestingly, we saw a brief dump in gold in the early evening, going down from $1496.50, all the way down $1481. The yellow metal made a sudden recovery, reclaiming its losses within a two-hour period and is currently trading back above $1500.
Third cut in a row
With yesterday’s rate cut, the third in as many FOMC meetings, the Federal Reserve is now a third of the way to undoing the 9 rate hikes it had previously conducted in its tightening phase, which officially ended on December 19, 2018. As we detailed yesterday, the rate cut came as no surprise to anyone and as such was broadly priced in by the market.
What wasn’t as readily priced-in was the Fed’s attitude going forward, which is why market participants were eagerly awaiting the post-announcement FOMC press conference.
With a 25 basis point rate cut almost certain, the press conference was an opportunity to gauge Fed Chairman Jerome Powell’s sentiment regarding the US economy and to try to tease out any clues as to whether another rate cut is likely before the end of the year.
Wait and see
As far as the FOMC’s statement was concerned, the language used was noticeably more measured. While in the previous statement the committee spoke of acting in the appropriate manner in order to “sustain the expansion”. This time round, gone are mentions of expansion, having been replaced with more tempered language about monitoring incoming data and assessing “the appropriate path of the target range for the federal funds rate.”
Powell’s statements have been broadly interpreted as testifying to a “wait and see” approach, meaning that further rate cuts are presently off the table, unless the economic data should worsen enough to warrant further action.
His general reading of the US economy is that it continues to be strong and growing at a moderate rate despite a business fixed investment and exports continuing to show signs of weakness.
There were two dissenting votes among FOMC members. Ester George of the Kansas City Fed and Eric Rosengren of the Boston Fed both voted to hold interest rates as they were.
Meanwhile, President Trump, has been attempting to publicly bully both the Fed and Jerome Powell, to not only continue cutting rates, but to also resume its quantitative easing program.
Just don’t call it QE
Speaking of quantitative easing, we were expecting further questions about the Fed’s repo operations and that’s exactly what we got. In his address to the assembled media, Powell was keen to reiterate that this is not QE and to differentiate it from the actions that the Federal Reserve took in response to the 2008 crisis.
In response to one of the journalists present, Powell went on to explain that the current balance sheet expansion the Fed has been engaged in this time is purely in the interests of stabilizing the Fed funds rate and as such shouldn’t be confused with quantitative easing.
Call it whatever you want though, the balance sheet has still expanded to the tune of $100 billion over the past month with the Fed set to continue its repo interventions up until January and its open market operations into Q2 of next year.
So what’s he really saying?
I think what we’re hearing from Chair Powell is that it’s the economy’s move and that we’ll only discover what’s to come next depending on the kind of data that continues to come in. What’s important to note is that he didn’t rule anything out. Further rate cuts may be on cards prior to 2020, it all depends on what kind of economic figures we see coming in from now until then.
Embedded in this logic is that the ball is now firmly in President Trump’s court vis-à-vis the China trade war. An agreement on this front is likely to ease pressure on the US economy and lead to some more optimistic readings for the US economy.
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