Fed cuts rates, adds another dissenter
Citing uncertainty over global growth and trade, the Federal Reserve today lowered the target range of its federal funds rate from 2-2.25% to 1.75-2%. The Federal Open Market Committee (FOMC) rate cut, its second in 2019, came even as it noted consumer spending was expanding at a moderate pace. This discrepancy likely is behind disagreement within the FOMC about the Fed’s action as two members dissented in favor of no change in rates, while one member favored a more aggressive 50 basis-point cut.
The Fed also released a new Summary of Economic Projections that reflected a more gradual glide path for the target range than is priced into the market. The median rate “dot” for 2019 and 2020 is 1.9%, right within the newly established target range, and it takes a gentle move upward in 2021 and 2022 to 2.1% and 2.4%, respectively. However, in response to a question about the dots, Chair Jerome Powell said it was difficult to have hardened expectations about where rates might be in a year. He also acknowledged that while the current situation calls for moderate rate adjustments, the Fed was prepared to be aggressive if need be.
As expected, Powell fielded several questions about the recent funding pressures in the repo market in his press conference. He asserted that conducting regular open market operations should not be necessary in the kind of ample reserves regime that the Fed has adopted. However, he admitted that the Fed would continue to engage in the kind of temporary operations that have taken place recently if needed to maintain control over the target rate. He expressed optimism that the Fed can bring the policy rate back within the intended target range.
The Fed did not unveil any new tools that could be used to regain the control over short-term rates. But it did announce a technical adjustment to those already in its toolkit by lowering both the interest that it pays on excess reserves and the rate that is paid on the reverse repo facility by 30 basis points each, to 1.7% and 1.8%, respectively.