Heisenberg Report

Fed Takes Out More ‘Insurance’, Cuts Rates For Third Time, Drops ‘Act As Appropriate’ Language

As expected, the Fed cut rates for a third time on Wednesday. Some say this will be the last cut in what policymakers have been keen to insist is merely a “mid-cycle adjustment”, not the beginning of a prolonged easing push.

In the statement, the Fed ditched the “act as appropriate” language, which some market participants may view as making a December cut less likely. That said, the Fed preserved references to vigilance around incoming data, a nod to the possibility of more easing.  “Uncertainties about this outlook remain [and] the Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate”, the statement reads.

As far as the economy goes, the Fed characterizes the labor market as “remaining strong”. Economic activity, the Fed says, has been “rising at a moderate rate”. Business fixed investment and exports are described as still “weak” and the inflation outlook is subdued.

In line with what most analysts expected, Esther George and Eric Rosengren dissented again. They have now argued against all three rate cuts. Minutes from the September meeting detailed the internal rift. Jim Bullard – who dissented in favor for a 50bp cut last month – did not dissent in favor of a larger move this time.

If the data continues to cooperate and there’s not another earthquake on the trade front, the Fed may want to take the opportunity to pause, avoiding a fourth cut in December in an effort to insist that what we’ve seen in July, September and now October, was indeed just the central bank taking out some “insurance” amid rampant uncertainty and signs that the US economy, while still resilient, is cooling off.

The global manufacturing slump has manifested itself in the US via two consecutive sub-50 ISM prints, and there are signs of spillover to services, as well as early indicators that the consumer is getting fatigued.

Still, data out Wednesday showed the US economy is generally holding up, thanks in no small part to the consumer, who again shouldered the burden in the third quarter.

Of course, the X-factor is always Donald Trump, who will doubtlessly “review” Jerome Powell’s press conference performance late Wednesday afternoon.

Full statement

Information received since the Federal Open Market Committee met in September 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 remain weak. 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 1-1/2 to 1-3/4 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. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

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; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.