Today the Fed cut interest rates by 25 basis points (bps), in line with market expectations, and the FOMC statement was little changed. Equity markets fell and the dollar strengthened modestly after the announcement.
In recent months there has been a distinct lack of consensus among FOMC members on the appropriate path for monetary policy, and this was apparent in today's decision. As was the case with the previous cut on 31 July, there were two dissenting votes favoring no rate cut. In addition, one member dissented in favor of a larger 50 bps cut.
The "dot plot," which indicates where FOMC members expect rates to be at the end of each calendar year, showed the majority of dots suggesting no further rate cuts. However, seven of the 17 dots indicate an additional 25 bps cut by the end of the year (see chart), which leaves the door wide open for the Fed to cut again at any future meeting if needed. Economic projections were little changed, showing GDP near its longer-run trend growth rate and inflation near the Fed's 2% target.
In the press conference after the decision, Fed Chair Jay Powell suggested that the main reason for cutting rates was insurance against risks from uncertainty over trade policy and slower growth overseas. He noted that future Fed policy would be highly dependent on the economic data and that they would "act as appropriate" on a meeting-by-meeting basis to sustain the economic recovery. This includes getting more aggressive on policy easing if needed. In line with previous statements, Powell suggested that the Fed could engage in further quantitative easing, but said that they were unlikely to use negative interest rates.
In recent days there has been funding pressure in the money market, and the Fed Funds rate broke through the top of Fed's target range. In response, the Fed injected liquidity to help bring rates back into the target range. Powell noted that this does not have implications for the broader economy, and in the short term the Fed will deal with the issue by making further injections if needed. Beyond this, the Fed will consider resuming expansion of its balance sheet so that this type of injection is not a frequent occurrence.
We maintain our view that the Fed will go on hold until there is evidence that the economic recovery is in danger. However, the number of dots indicating one more move this year does suggest that it would not take much for the Fed to cut again.
Market pricing in further cuts
Fed funds futures and dots from FOMC Summary of Economic Projections, in %
Brian Rose, Senior Economist Americas, UBS Financial Services Inc. (UBS FS)