While the assumption is that Fed officials (having passed on the opportunity to lean against dovish market expectations) would not shock the market and vote to keep rates unchanged (96% odds and Fed has never surprised at that level), that's precisely what happened when the Fed announced it would cut rates by another 25bps, the 3rd rate cut in the past 4 months, and now the big question is whether this will be the last rate cut for the foreseeable future.
Key takeaways (via Bloomberg) from the FOMC decision:
- Fed cuts federal-funds rate target range by a quarter point to 1.5%-1.75% -- as investors and most economists expected -- in the third straight reduction aimed at protecting the record-long U.S. expansion from threats posed by tariff wars and weak global growth, amid “muted inflation pressures”
- But FOMC signals it could pause, as the statement omits the familiar pledge from recent months to “act as appropriate to sustain the expansion”; Fed instead says it will monitor incoming information as it “assesses the appropriate path” of rates
- Fed still leaves door open to easing, saying that uncertainties remain around its outlook even as it calls labor market and consumption “strong”; acknowledges that business investment and exports “remain weak”
- Kansas City Fed President Esther George and Boston Fed President Eric Rosengren also dissent for third straight time, preferring no rate move at this meeting; St. Louis Fed President James Bullard votes with FOMC majority after dissenting at prior meeting in favor of half-point cut
- Fed lowers two other key interest rates by quarter point, bringing interest on excess reserves rate to 1.55% and discount rate to 2.25%
As expected, and priced in, The Fed cut rates 25bps and shifted the wording in the statement to a more hawkish stance, from:
"...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."
"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."
Of key note to stocks, the "act" in "act as appropriate" was key to giving markets comfort that the Fed act, not be "patient." Its removal will thus be seen as modestly hawkish, even if it was largely as expected (see Goldman's proposed redline).
There were two dissents, Rosengren and George, who were both in favor of no cuts. Notably Jim Bullard did not dissent (dovishly) this time, which could suggest the doves are backing away from their demands (although it also means that Powell's job is Kashkari's to have, as soon as he speaks next week that he was in fact hoping for a 100bps rate cut).
Full Redline Below:
* * *
Heading into today's arguably final "insurance" rate cut, since the Fed cut rates in September, stocks have outperformed as the dollar, bonds, and gold have lost some ground...
The yield curve has steepened (back into un-inversion) since The Fed cut in September...
The "cut-and-pause" narrative is priced across the FF curve...
But, the stock market and Fed Funds market are disagreeing over how much easing is priced in...
While we had a stronger than expected GDP print today, US Macro has been notably disappointing since the September cut...
Having said that, the size of bets on The Fed getting back to 'zero' have been rising...
One excuse The Fed had for cutting rates has faded as the odds of a trade deal have risen...
And finally, before we get to what Powell actually did today, we note that the repo-calypse is very much not under control yet...