On the 30th of October 2019, the Federal Reserve cut the benchmark interest rates range for the third time in 2019 by 25 basis point between 1.5% to 1.75%, continuing the so called “mid-cycle adjustment”.
This rate cut, that was widely anticipated by market operators, reflects the commitment of the Fed to keep the current economic expansion going.
Many compare these adjustment to the rate cuts made by Alan Greenspan between 1995 and 1998 and consider this last cut as an insurance cut.
While in the short term this gives markets a relief, at the same time is should signal that this cycle of rate cuts is completed, so we should not expect other cuts (for now).
The statement of the FOMC was neither hawkish nor dovish, now that the third rates cut is done, the Fed should observe how things unfold.
In fact, they shifted the forward guidance from “act as appropriate to sustain the expansion” to the intention to monitor data as it “assesses the appropriate path of the target range for the federal funds rate”.
This indicates a pause on future adjustments, if economic risks don’t get worse, at the current state of the economy we should not expect another rate cut by the end of the year.
To really go deep into what the Fed has to say, we have to wait a couple of days for the FOMC’s statement (the Fed Minutes).
In conclusion, Powell pointed out that the Fed doesn’t plan to start a prolonged easing cycle.
Until now, the Fed decided upon the lack of improvement in the economy whether to cut interest rates. Now that the adjustment cycle is done, has the bar changed to the need to see further deterioration in the economy in order to act?
We will see. What we know today is that the Fed kept its options open and continues monitoring economic developments should the economy weak further: “Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly,” Powell said. “Policy is not on a preset course.”.
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