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U.S. Fed cuts rates a second time in September in another insurance move against growing headwinds

At its 17–18 September monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) voted to cut its target range for the federal funds rate to 1.75%–2.00%. The Bank’s decision came in a bid to stimulate economic activity and to “provide insurance against ongoing risks”, as Fed Chairman Jerome Powell explained, and was in line with the large majority of FocusEconomics panelists’ expectations.

The Fed’s decision to ease monetary conditions was to safeguard against intensifying external headwinds from slower global growth and uncertainty from the U.S.-China trade dispute, which are dragging on business investment and exports, despite a favorable economic outlook. The Fed continued to deem the economy as strong, against the backdrop of robust household spending buttressed by a solid labor market. The Fed revised up its GDP growth projection to 2.2% for 2019 (June forecast: +2.1%) and continues to expect growth of 2.0% in 2020. Meanwhile, inflation continues to persistently run below the Fed’s 2.0% target amid subdued energy price pressures, giving the Bank additional space to turn more accommodative. In his press conference following the announcement, Powell also mentioned the Fed would be assessing the size of its balance sheet in upcoming meetings, suggesting that a return to balance sheet expansion at the October meeting is very likely.

Notably, the Fed remained divided over the course of action as several policymakers voted against the quarter-point rate cut. One member voted in favor of a deeper cut, while two members voted to hold the range steady.

The Bank’s announcement comes on the heels of its first intervention in the overnight lending market since the financial crisis. On 17 September, the New York Fed unleased USD 53 billion of short-term cash after tight liquidity conditions pushed the federal funds rate well above the upper limit of the target range. This was followed by a second injection of USD 75 billion the following day. The overnight lending market is vital for banks’ short-term borrowing and rising pressures raises concerns over low reserve levels.

The Fed’s statement was relatively devoid of forward guidance, while Powell’s statement also lacked clear direction. According to the Fed’s dot plot—which tracks the projections for the future rate path—the median forecast is for rates to remain as is, and only a handful of participants expect another 25-basis point cut before year-end.

Last month, the majority of FocusEconomics Consensus Forecast panelists expected the federal funds rate to end 2019 at 1.95% and 2020 at 1.77%. Updated forecasts will be published on 23 September.