Fed Cuts Rates In 7-3 Decision, IOER Tweaked, Committee Divided On Future Easing

Under withering criticism from the White House to deliver aggressive easing, the Fed on Wednesday cut rates for the second straight meeting.

The 25bp move will disappoint Donald Trump, who has advocated for deep cuts and earlier this month went so far as to call his Fed chair a “bonehead” in the course of demanding rates be cut to “zero or less”.

Trump’s exhortations come as polls suggest voters are concerned about the domestic economy and as the administration seeks to reclaim a competitive advantage in the trade dispute which the president worries is being lost thanks to policy easing abroad.

Presidential balderdash notwithstanding, the economic case for aggressive cuts is hard to make. The data continues to hold up reasonably well, although the contraction-territory ISM manufacturing print, slumping consumer sentiment and persistent uncertainty around trade help justify a handful of precautionary 25bp cuts. We now have two under our belts.

Read more: Jerome Powell’s Fed Stares Down Trump, Trade And Markets In Pivotal September FOMC

The decision was 7-3. Esther George and Eric Rosengren dissented again, as expected, and in line with comments they delivered ahead of Jackson Hole (here and here). Jim Bullard dissented in favor of a 50bp cut, in keeping with his own recent comments to the media.

The new dots show officials are divided on the necessity of more easing. Seven officials see the year-end funds rate at 1.625%.

Although August was characterized by volatility around trade escalations and worries about the economy (fueled by the inversion in the 2s10s curve), September saw a modest improvement in the macro narrative as incoming data suggests the US consumer remains healthy, while the US and China are set to engage further on trade. The September Fed statement reflects a reasonably upbeat take on things as the labor market is characterized as remaining “strong” and economic growth as “moderate”. Household spending is described as “strong” while exports and investment are flagged as “weakening”.

The second paragraph retains the “act as appropriate” language and does not include anything that suggests a predisposition towards aggressive easing going forward.

Complicating things for Powell headed into the meeting was this week’s acute funding stress in money markets tied to a combination of idiosyncratic factors and legacy/structural issues, which forced two straight days of intervention by the New York Fed as the funds rate pushed through the upper end of the target range.

That prompted a number of desks to speculate that the Fed may announce its intention to expand the balance sheet in order to offset reserve depletion. Opinions varied on whether the Fed would get out ahead of the curve in that regard or stick with incremental fixes including the telegraphing of “as needed” short-term repos and another IOER tweak.

Ultimately, the Fed lowered IOER by 30bps. It’s the fourth such “adjustment” since 2018.

Powell will need to address this issue in the press conference in light of the media attention it’s garnered this week, especially after the effective rate breached the upper end of the target range.

All in all, this decision skews decidedly hawkish – or at least it appears that way at first blush. Powell will have an opportunity to spin things in his remarks, but he’s never been particularly adept at that.

Statement

Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.

Implementation note

• The Board of Governors of the Federal Reserve System voted unanimously to lower the interest rate paid on required and excess reserve balances to 1.80 percent, effective September 19, 2019. Setting the interest rate paid on required and excess reserve balances 20 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC’s target range.
• As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:”Effective September 19, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.70 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
• In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 2.50 percent, effective September 19, 2019. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Chicago, Minneapolis, Dallas, and San Francisco.

This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy.

Dots

September

June

Projections

September

June