This afternoon, the FOMC (Federal Open Market Committee) announced today it intended to cut the overnight lending target bank between member banks by 25 basis points to a range of 1.50-1.75%, and instructed the Open Market Desk at the Federal Reserve Bank of New York to “undertake open market operations as necessary” to this end effective October 31, 2019. In layman’s terms, the Fed cut rates as everyone, and their brother, knew it was going to do.
In truth, this single monetary policy decision was almost a foregone conclusion, a fait accompli as our French friends might say. What the markets really wanted to know is/was, will there be another rate cut anytime soon? If the initial reaction in the futures market is indicative of anything, the ‘Fed’ is likely on hold for a while, possibly through the end of the 1st Quarter of 2020. The markets are reading changes to the last paragraph of the released statement as such. For grins, here are the overanalyzed sentences from the September 18, 2019, meeting followed by today’s verbiage:
“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”
And today’s equivalent:
“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.”
To be sure, the phrase “will act” does add a little more, shall I say, oomph to the September verbiage. It gives the entire sentence the feel the Fed has its ‘finger on the trigger’ just awaiting to do what it needs to do. By comparison, the October wording seems a little more along the lines of: “we have done what we need to do, and will wait and see if we need to do anything.” Obviously, this is kind of splitting hairs, but ‘we’ have been parsing Fed statements for decades, and it isn’t going to change any time soon.
As a result of today’s Fed move, the dollar has rallied against over major trading currencies, as speculators assume there won’t be any more rate cuts for roughly half a year. This has also led to a decline in longer-term interest rates, as inflation expectations have diminished. This has flattened the yield curve, and small cap and emerging market stocks have dropped in association. Essentially, the markets have taken a little risk off the table for the time being, repeat, risk off for today…but not too much. For consumers, the Prime lending rate will fall to 4.75%, meaning credit cards, HELOCs, and other forms of revolving debt just got a little cheaper. Unfortunately, deposit rates will likely go down as well, eventually. Whew.
You know, it really IS amazing so much hinges on the very few words of a group of, largely, academics working as bureaucrats. However, it is what it is, and that is another widely predicted rate cut has come and gone and the Fed is probably ‘on hold’ for now.
Take care.
John Norris