Fed implements third rate cut, moves to neutral

Today the Federal Reserve cut interest rates by 25 basis points, lowering the target range to 1.5–1.75%. This was in line with expectations and left markets little changed. The Fed has now cut rates by a total of 75 basis points since July.

The FOMC statement had only subtle changes. They dropped the phrase about contemplating the future path of rates and also changed the phrase "act as appropriate" to "assess the appropriate." These changes hint at a more neutral stance, while still leaving open the possibility of additional moves at any future meeting.

Fed Chair Jerome Powell made this clear in his press conference, stating that the current stance of monetary policy was "likely to remain appropriate" as long as the economy develops in line with the Fed's expectations: moderate growth with a strong labor market and inflation near the 2% target. Recent economic data, including this morning's GDP report (1.9% GDP growth rate and 2.2% annualized core PCE inflation in 3Q19), support this view. With US-China trade negotiations appearing to make progress and less risk of a no-deal Brexit, the Fed now feels that they have done enough. Powell said that the Fed would only change policy if there was a "material reassessment" of the economic outlook.

Powell also took this opportunity to state again that the Fed's recent decision to buy Treasury bills was not another round of quantitative easing. While QE focused on longer-term bonds in an attempt to lower yields and ease broad financial conditions, the bills purchases should not have much impact on broad conditions.

Although the Fed appears to be on hold for the moment, we would note that risks are still skewed to the downside. If growth slows in line with our forecasts, the Fed could be forced to implement additional rate cuts. Fed funds futures markets are currently pricing in around 40 basis points of cuts by the end of 2020.

By Brian Rose, Senior Economist Americas

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