Fed looks divided on future path

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The Federal Open Market Committee vowed to “act as appropriate to sustain the expansion,” keeping the federal funds rate target at a range of 2.25% to 2.50% at its two-day meeting.

The post-meeting statement no longer includes the word “patient,” though it mentioned “uncertainties” to expectations the expansion will continue, with labor market strength and inflation below the Fed's 2% target. It also downgraded the pace of economic activity to moderate from solid.

Federal Reserve Bank of St. Louis President James Bullard dissented on the vote, as he would have liked to see the rate cut by 25 basis points.

“The case for more accommodation has strengthened,” Fed Chair Jerome Powell said at his press conference. He also said the FOMC doesn’t “want to be seen as weak on inflation.” He reiterated that the dot plot is “not a forecast,” just guidance on the most likely scenario, which can change.

There was “not much support for cutting rates now,” he said, as the panel thought it was “better to see more [data] before moving.”

Powell said the economy is “a complicated picture” with many solid points, while manufacturing and trade have been weaker.

The Summary of Economic Projections showed a divided Board, with eight members expecting rates to remain steady all year, eight expecting rates to drop, and one seeing an increase.

GDP for this year is still seen at 2.1%, although the forecast for next year was raised a tick to 2%, while the 2021 level is still expected to be 1.8%.

Unemployment forecasts fell 0.1-point across the term to 3.6% this year, 3.7% in 2020 and 3.8% in 2021. The SEP also showed the panel expects inflation to fall below its 2% target through 2020.

“Members of the Fed handed the markets what they were looking for by now predicting rate cuts,” said Bryce Doty senior vice president/senior portfolio manager at Sit Fixed Income. “I assume members saw significant weakness due to trade tariffs and the resulting supply chain problems that many companies are struggling with.”

While the Fed won’t rush into an “insurance policy” rate cut, Brian Coulton, chief economist at Fitch Ratings, said, “the bias has clearly shifted.”

While the median projection for interest rates this year was held, “the door is now ajar for an easing in monetary policy, but it is far from certain if a rate cut will slip through in 2019,” Coulton said.

Mike Fratantoni, Mortgage Bankers Association SVP and Chief Economist, noted, “the statement makes no suggestion that a rate cut is coming soon,” though the SEP shows many members support rate cuts this year and next.

“Markets are going to have a difficult time digesting these mixed messages, as it indicates that the Fed recognizes the slowdown, but is not yet committed to cut rates this year,” he said.

In the press conference, Powell said while trade has driven the discussion of a slowing economy, the FOMC is “not focused on one risk or one piece of data” in assessing the economy and monetary policy.

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Monetary policy Jerome Powell Federal Reserve FOMC
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