Seven-Two-One - September 23, 2019
The Federal Reserve slashed its key lending rate, the fed funds rate, by 0.25% to a range of 1.75-2.00%. The decision came as no surprise, but the result highlighted the divisions within the Fed. The final vote: seven in favor of the cut, two preferred keeping rates unchanged, and one voted for a 0.50% reduction.
In its statement, the Fed touted several of today’s economic positives, including “strong” consumer spending, “solid” job gains, and a “moderate” rate of economic growth. But it also acknowledged that business spending has been soft, and exports have “weakened.”
Despite the generally favorable environment, Fed Chief Jerome Powell said during his press conference that the Fed’s decision was designed to provide “insurance against ongoing risks,” i.e., help support economic growth.
Looking ahead, the Fed didn’t commit to additional rate cuts, which was no surprise. However, forward-looking guidance and comments from Powell after the meeting suggest the Fed is still considering at least one more rate reduction this year.
Could the Fed turn more aggressive? Well, it depends on how the economic outlook unfolds. Powell left the door open when he remarked, “If the economy weakens, then we're prepared to be aggressive, and we'll do so if it turns out to be appropriate.”
The fed funds rate isn’t far from zero. The Fed doesn’t much conventional ammunition to fight an economic downturn. If economic activity were to slow too quickly, the Fed’s preferred method, outside reducing interest rates to near zero, would be to re-start quantitative easing (QE), or large-scale bond purchases. It’s something the Fed did during and after the financial crisis.
When asked about cutting rates below zero—Europe’s path, Powell was cool to the idea.
Today, leading indicators, such as the Conference Board’s Leading Economic Index, are not suggesting a dramatic response is needed.