As expected, the Fed cut short-term interest rates by 25 basis points today, moving the range for the federal funds rate down to 1.75 - 2.00%. At the same time, it lowered the interest rate on excess reserves (IOER) to 1.8% and the re-purchase (repo) rate to 1.7%, five basis points below the bottom of the Fed Funds range. In his press conference, Chair Powell confirmed these were "technical changes" in reaction to repo rate pressures earlier this week. We published a piece earlier today with our thoughts in the repo market jitters, but suffice it to say we see the issues coming from poor regulatory policy, not a lack of money in the system.
Oddly, while cutting rates, the Fed made only minor changes to it's economic outlook, doubling-down on the move away from data dependence. Perhaps that's why there are now more quarrels within the Fed itself, with three voting members dissenting. Kansas City Fed President Esther George and Boston Fed President Eric Rosengren voted today to keep rates unchanged, while St. Louis Fed President James Bullard voted to cut rates by 50 basis points.
Chair Powell highlighted two reasons for moving rates. First, business "uncertainty" and slower global growth - which seem to have passed employment and inflation as areas of focus for the Fed, despite admission by the Fed that it doesn't have the tools to impact the trade dispute - have the Fed concerned about future growth. And second, Powell stated that the Fed's view on the appropriate level of rates to sustain growth have "changed significantly" towards a lower path. If the data doesn't support your actions, move the goal post. It's the policy justification equivalent of saying "It's not you, it's me."
All that said, the dot plot suggests no more rate cuts in 2019. But take that with a grain of salt. No further rate cuts are needed in our view (on a nominal basis the U.S. economy has grown at a 5% annualized rate over the past eight quarters), and we don't think either of this year's rate cuts were justified, but the Fed seems tilted towards action. In Fed forecasts as recently as June, the median dot in the dot plot showed no rate cuts this year. Since then the Fed has cut rates twice. Our best guess is that the Fed will probably – not definitely, but probably – cut rates one more time in 2019, and, if so, more likely reduce rates in December than October.
Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist
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