- As widely expected, the Federal Open Market Committee (FOMC) reduced the target range for the federal funds rate to a range of 1.50% to 1.75%. As in the previous decision, Esther George and Eric Rosengren dissented in favor of leaving the rate unchanged.
- In line with the September statement, today’s release characterized the labor market as strong and “that economic activity has been rising at a moderate rate.” However, it also noted that business investment and exports “remain weak.”
- The statement once again pointed to global developments as well as muted inflation pressures as reasons for cutting rates. However, it removed from the statement the proviso that it will “act as appropriate to sustain the expansion, “noting simply that “it will continue to monitor the implications of incoming information…as it assess the appropriate path of the target range for the federal funds rate.”
Key Implications
- The FOMC delivered on what might be called a hawkish cut. While they have left themselves flexibility to respond to developments in economic data, they have raised the bar for additional rate hikes by removing the forward guidance that they stand ready to act to sustain the expansion.
- It’s not time to bust open the champagne; after all, as the statement notes, “uncertainties about this outlook remain.” Still, there is good reason to believe that, as it was in the mid 1990s, the three insurance cuts the Fed has provided are enough to leave the economy on an even keel. Indeed, there are nascent signs that economic activity is stabilizing at a moderate rate. Positive data on home and auto sales suggest that domestic demand is getting the fillip of lower interest rates, helping to mitigate the risks posed by external weakness and trade uncertainty. At the same time signs of a détente between China and the U.S. suggest that the worst of the trade-related uncertainty shock may finally be in the rear view mirror.
