Gary Pzegeo, CFA
September 19, 2019
Earlier this week, I shared a short clip with my thoughts on what could come of the FOMC meeting.
Divergence between market expectations and Fed messaging has been an ongoing theme over the past several months. Markets have been pricing in a series of rate cuts and the Fed has been guiding toward a more moderate path. The Fed may have cut its policy rate by 0.25%, but the messaging is not what the market has discounted for future rate expectations. Further, the views of the individual members reveals a level of divergence at the Fed itself which clouds the outlook for policy.
Here is a summary of yesterday’s release:
There was very little change in how the Fed characterized the economic environment when compared to its last meeting. Strength of the consumer and weakness in business spending were emphasized. Market implied levels of inflation remain below the Fed’s target.
The Fed’s press release and supporting projections suggest a high level of uncertainty. The base case continues to include slow growth, strong labor markets and inflation rising toward the targeted level of 2% over time. Yesterday’s action is the second “insurance” cut taken by the Fed to offset the risk of global developments undermining the base case outlook. The “dot plot” suggests the Fed is done cutting for 2019 and 2020, but the underlying votes are split. Five of the 17 voters project a rate increase before the end of the year while 7 voters believe another cut is required.
The Fed cut its target range to 1.75% to 2.0%, but there were 3 dissenters on the FOMC. Two members believe no change was necessary while one called for a 50 basis point reduction. The Fed made a larger cut to interest paid on bank reserves in an attempt to reduce stress in the short term funding market.
Equity markets initially weakened, but eventually recovered toward the close of trading. Treasury yields and the Dollar both reflect a somewhat hawkish bias in policy.
Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.
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