Fed Cuts Rate for Second Time in 2019

By Richard Branch, Chief Economist, Dodge Data & Analytics
BEDFORD, MA – September 19, 2019 – As widely expected, the Federal Reserve’s Open Market Committee (FOMC) lowered its federal funds rate range by 25 basis points (bps) to 1.75% – 2.0%. This marks the second rate cut of the year. What was less certain about the Fed’s move, however, was how they would portray current risks to the economy and what that implied for further changes to the federal funds rate.
In the accompanying press release, the Fed noted that consumer spending “has been rising at a strong pace” due to underlying strength in the labor market. This phrasing was slightly more upbeat than in July’s release when they also cut rates. However, they also noted “business fixed investment and exports have been weakening”, a more ominous tone than in July and a nod to potential risks to the economy caused by trade tensions with China. Overall, the Fed remained upbeat and raised their 2019 GDP forecast from 2.1% to 2.2%, with economic growth pegged at 2.0% in 2020, unchanged from their previous forecast.
The “dot plot”, which shows individual committee members’ expectations of the future path of the federal funds rate, also shifted slightly. The median path of the plot now suggests that the rate will remain in its present range through the end of the year, after the 50 bps of easing that occurred between July and September. Interestingly, it also suggests no further cuts in 2020, before rates move higher in 2021. Three committee members dissented in this month’s vote (one more than in July). Two voted against any rate cut and one voted in favor of a 50 bps cut.
Yesterday’s cut was largely priced in by the markets so there should be only minimal effects on bond markets and short-term interest rates. The FOMC has two more meetings in 2019 – in October and December. Dodge Data & Analytics continues to expect one more rate cut this year, with the potential for an additional cut in 2020 in anticipation of much slower economic growth by yearend.



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