Federal Reserve Eases Reluctantly

The Federal Open Market Committee (FOMC) cut short-term interest rates another quarter-point at its meeting today, reversing three of the four rate hikes of 2018. The fed funds target range is now 1.5%-1.75%, the same as it was after Chairman Jay Powell raised rates for the first time in his tenure in March 2018. Presidents Eric Rosengren of Boston and Esther George of Kansas City both voted to dissent, as they have at the last two meetings; they preferred to keep rates unchanged.

The statement following the meeting revealed less urgency and the need for a pause. There is a clear sense of rate-cut fatigue growing within the ranks of the Federal Reserve. Only two regional Fed bank boards recommended a cut at this meeting. That compares to four in September and five in July. There were six regional Fed presidents opposing a rate cut at this meeting. That is up from four who opposed the cut in July. Charlie Evans of Chicago sided with the Chairman and voted for the cut; he was straddling the fence on rate cuts prior to the meeting.

Presidents Jim Bullard of St. Louis and Neel Kashkari of Minneapolis tempered their calls for a half-point cut prior to this meeting. They both wanted only a quarter-point cut. The minutes from this meeting will reveal pushback on the decision to cut rates.

Chairman Powell made clear in his comments that this rate cut was less about insurance and more about sustaining a “high pressure” economy. In the 90s, that meant that all who wanted a job had a job - even those who didn’t want a job had a job. Stay-at-home moms and retirees were lured back into the labor force by rising wages and extremely flexible schedules. The goal now is to add heat to what has been a marathon of an expansion to engage more of those on the sidelines of the race. Powell underscored again how touched he was by reports that the longer the expansion extended, the more people it could include. The Fed can’t cure all of what ails us, but it can help keep the expansion going for a while longer.

That said, there are some concerns that bubbles are emerging, most notably in corporate debt. Powell said that the Fed is monitoring those markets accordingly. Many of those opposing a rate cut today are concerned about emerging bubbles in the junk bond, private equity and commercial real estate markets. Debt is less of a worry for households.

Separately, the Fed continues to deal with problems in the overnight credit market. Powell said that they will increase the Fed’s balance sheet to at least match the levels that we saw before the problems in September. It remains unclear what will fix the overnight repurchase market. The sheer abundance of Treasury debt is becoming more difficult for the market to absorb.

Powell didn’t want to comment on that issue, as it would put the Fed into the middle of the fiscal policy debate. That is not a place Fed officials want to be on the eve of an election year.

Bottom Line
The Fed is growing tired of cuts and would like to move back to the sidelines. However, the bias to cut rates further remains in place. The threshold to cut rates is much lower than the threshold to raise rates. Our forecast is for the Fed to hold off until 2020 before cutting rates again. Much will depend on whether we can avoid another government shutdown and a further escalation of trade tensions with China.

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