FOMC lowers rates by 0.25%

Gary Pzegeo, CFA
July 31, 2019

The Fed delivered the rate cut markets have been expecting, but may have disappointed those calling for a more aggressive approach to stubbornly low inflation and deteriorating global economic conditions.

All signs point to the Fed taking out an insurance policy for the U.S. economy against global weakness and trade uncertainties.  The Chairman was also quick to state that today’s cut wasn’t necessarily “one and done.”

Here is a summary of today’s release:

Growth & Inflation

There was very little change in how the Fed characterized the economic environment when compared to its last meeting or the Chairman’s semi-annual testimony to the House and Senate Banking Committees.  Economic growth has been moderate with consumer strength offsetting weaker business spending.  Actual inflation is running below target and market expectations for inflation remain low.

Forward Guidance

Markets have debated the appropriate pace of easing by the Fed for several months leading up to today’s cut.  The Fed’s press release and the Chairman’s statements in the post-meeting press conference suggest a slower, more shallow easing path than the market had discounted.  Powell compared the current outlook to previous mid-cycle adjustments in policy rather than the start of a lengthy rate cutting cycle.

Implementation

In addition to cutting the target range to 2.0% to 2.25%, the Fed announced the end of balance sheet reduction effective 8/1.  This is two months earlier than previously announced and will likely result in greater reinvestment in U.S. Treasuries.  Two voting members dissented from the majority, preferring instead to maintain the target range at 2.25% to 2.5%.

Equity markets, the U.S. Dollar and shorter-term Treasuries adjusted to the prospect of fewer rate cuts than previously expected.

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.