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United States Monetary Policy October 2019

United States: U.S. Fed cuts rates again in October but signals pause ahead

At its 29–30 October monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) voted to cut its target range for the federal funds rate by 25 basis points to 1.50%–1.75%. The decision, which marks the third rate cut this year, was consistent with the majority of FocusEconomics panelists’ forecasts and brings the Fed’s total monetary easing year-to-date to 75 basis points. Looking ahead, the Bank’s forward guidance suggests the Bank will pause this year’s adjustments for the time being.

The Bank’s latest move was guided by its efforts to sustain the economic expansion in the face of swelling risks to the outlook, especially linked to the ongoing U.S.-China trade rift and the global growth slowdown, while below-target inflation provided additional justification to pursue further easing. The October meeting came on the heels of the latest GDP report, which showed the U.S. economy slowed in the third quarter due to a continued decline in fixed investment and weak exports. Nevertheless, the Fed continued to emphasize that the labor market and household spending remain strong.

Looking ahead, the Fed signaled it would likely maintain the target range at its current level, as it monitors the lagged effects of its previous rate cuts. In the accompanying press conference, Fed Chairman Jerome Powell noted that the economic outlook is favorable, stressing that “we believe that monetary policy is in a good place” and that “the policy adjustments we have made to date will continue to provide significant support for the economy.” The FOMC views its current stance as appropriate, as long as the economy evolves in a manner consistent with the Fed’s scenario of moderating growth, a robust labor market, and inflation rising near the Bank’s 2.0% target. As such, the Bank is expected to hold fire at its last 2019 meeting in December and into 2020. While Powell did note that the Fed would respond accordingly to a significant change in the outlook, stating that “policy is not on a preset course”, only a notable rise in headwinds would likely prompt the Fed to veer from its current path.

David Mericle and Jan Hatzius, economists at Goldman Sachs, explained:

“Fed Chair Jerome Powell set a high bar for further cuts in his post-meeting press conference. In practice, we think this would likely mean a few pieces of very weak data or a combination of trade war escalation, an adverse market reaction, and fairly bad data. We therefore see just a 15% chance of a cut at the December meeting.”

Moreover, the Fed also raised the stakes for any future tightening, as analysts at Nomura point out:

“Powell flagged that future interest rate increases will depend on inflation, stressing that the Committee “would need to see a really significant move up in inflation that’s persistent before we even consider raising rates.” […] He emphasized that at this point, realized inflation is the only thing that would motivate the Committee to raise rates.”

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