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Comment: FOMC lowers fed funds rate range by 25 basis points to 2.00%-2.25% as expected

As expected, the FOMC lowered the fed funds rate target range by 25 basis points to 2.00%-2.25%. The statement said, “the implications of global development developments for the economic outlook as well as muted inflation pressures” as the reason. It also remained dovish on the outlook for future rate cuts, saying “it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

However, the vote for the rate cut faced two dissents from Kansas City Fed President Esther George and Boston Fed President Eric Rosengren both who preferred no change in the fed funds rate. This suggests that any future rate cuts could be a harder sell to the Committee, especially if the economic data continues to reflect modest expansion. In his post-meeting press briefing, Chair Jerome Powell asserted that the decision was independent of political pressure. He declined to signal that more rate cuts were on the near horizon and that the FOMC remains data dependent and monitoring developments.

The rate cut was the first since the FOMC took the lower end of the range down to 0.00% on December 16, 2008 and ends the long, shallow tightening cycle begun on December 15, 2015 which lasted 44 months and saw rates rise 225 basis points. Powell called the July 31 action a “mid-cycle adjustment in policy” and cautioned that is should not be characterized as the start of an easing cycle. He said that the outlook for the US economy remains favorable and that the present reduction in rates was to insure against downside risks, offset impacts seen from “simmering” trade tensions, and support a return to the 2% inflation objective.

The accompanying implementation note saw the discount rate lowered to 2.75% by the Board of Governors, the IOER down to 2.10%, and the ON RRP offer rate down to 2.00%.

The program of reductions in the balance sheet was announced to occur two months sooner than previously expected. The New York Fed issued a statement. Powell said the decision to end the reductions as of August 1 was for “the sake of simplicity and consistency, nothing more than that”.

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