Fed Cuts Rates as Expected … Three and Done or More to Come?

October 30, 2019

 

 

As expected, the Federal Open Market Committee (FOMC) lowered the federal funds rate by 25 basis points to a range of 1.5% to 1.75%; while hinting it may be in pause mode in the near-term. The committee also lowered the interest rate on excess reserves (IOER) by 25 basis points.  As was the case with the prior two rate cuts, both Kansas City Fed President Esther George and Boston Fed President Eric Rosengren dissented—preferring to keep rates unchanged. There was no release of a new set of economic forecasts or rate projections at this meeting, so there is no transparency with regard to how many non-voters on the FOMC felt a rate cut was justified.

 

Specifically, the FOMC statement no longer contains the pledge to “act as appropriate to sustain the expansion,” while adding a promise to monitor data as it “assesses the appropriate path of the target range for the federal funds rate.” As a basis for cutting rates for the third time this year, the statement cited the implications of trade and other global developments; noting that business fixed investment and exports “remain weak.” But it also highlighted the generally-positive condition of the expansion; with a description of the labor market as “strong,” job gains as “solid,” and household spending rising at a “strong pace.”

 

Federal Reserve chairman Jerome Powell has been on record saying he did not expect an extended series of rate cuts; but instead has been representing rate cuts as “insurance” for an economy wounded by tariffs, trade uncertainty and weak global growth. Although the three rate cuts this year have done nothing to ease trade uncertainty, they have been a fillip to interest-sensitive sectors of the economy, like housing; as well as providing a boost to the stock market.

 

Earlier today, we got the initial release of third quarter real gross domestic product (GDP), which came in at 1.9% (slightly above the consensus expectation). The report from the Bureau of Economic Analysis (BEA) showed healthy consumer spending (albeit well down from the prior quarter) and a jump in residential investment; offset by a contraction in business investment.

 

Since the early-1980s there have been eight interest rate cutting cycles that have had three or more rate cuts. In 1982, 1985 and 1988 the Fed had less than two cuts left after the third one in those cycles and there was no subsequent recession (the 1982 recession was already ending). In those three cases, the stock market performed quite well in the subsequent six months.

 

In 1984, 1989, 1996, 2001 and 2007, the Fed had at least two cuts left after the third one. In three of those cases (1989, 2001 and 2007) the Fed continued to cut rates due to subsequent recessions. In those five cases, the stock market performed fairly poorly on average (especially following the 2007 third cut).

 

U.S. stocks moved higher after the announcement. In an internal note from my colleague Kathy Jones, our chief fixed income strategist, she noted that yields were falling for much of the day and there was limited movement in the immediate aftermath of the FOMC announcement. The 10-year treasury yield is holding near the 1.8% level; with an expectation that longer-term rates could move up modestly based on the slightly more hawkish tone to the statement.

 

In the post-meeting press conference, Powell said that a “material reassessment of our outlook” would represent the bar for another rate cut and that “we’re not thinking about raising rates right now”—certainly suggesting he is ruling out additional rate cuts in the near-term, barring a significant shift in the trajectory of the economy. He was also asked a question about what might cause the Fed to shift back to raising rates; to which he replied that “we’d raise if we saw inflation moving up or likely to move a lot higher, which is not a risk we really see right now.”

 

Although this commentary was put to bed before the end of the press conference, the clear “on hold for at least a bit” mention added to the more hawkish tone of the statement. Also important was Powell’s comment that “policy is not on a preset course”—showing again that the FOMC will make decisions going forward on a data-dependency basis. 

 

Follow Liz Ann Sonders on Twitter: @lizannsonders.

Important Disclosures:
 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 

 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

 

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

 

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

 

©2019 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.

 

(1019-91HD)

 

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.

 

Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

 

The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons.

 

This site is designed for U.S. residents. Non-U.S. residents are subject to country-specific restrictions. Learn more about our services for non-U.S. residents.

 

© 2019 Charles Schwab & Co., Inc, All rights reserved. Member SIPC. Unauthorized access is prohibited. Usage will be monitored.

Share on Facebook
Share on Twitter
Please reload

RECENT POSTS
Please reload

Investment advisory services offered through (RIA Name), a registered investment adviser. This site is published for residents of the United States only. Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of the services referenced on this site are available in every state and through every advisor listed. For additional information, please contact PGWM, LLC at rar@pgwm.net.

© 2019 Private Group Wealth Management, LLC  

150 E Main Street, Fredericksburg, TX 78624

Tel: (361) 442-5105      Fax: (361) 888-5105       email: rar@pgwm.net

DISCLOSURES   PRIVACY   FORM ADV    CONTACT    HOME

Website Maintenance    ID•GRAPHICA   idgraphica.custom@gmail.com