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Comment: FOMC cuts feds fund target by 25 basis points, makes adjustments to other short-term rates; SEP signals no more cuts this year

The FOMC statement for the meeting of September 17-18 was overall little changed from the one on July 31. It still characterized growth as moderate and inflation as below target with low market-based inflation compensation and basically unchanged consumer inflation expectations. It said consumer spending was “strong” rather than merely “picked up” during the intermeeting period as was in the prior version. It added in that “exports have weakened” to soft business spending on fixed investment. Again, it was the “implications of global developments for the economic outlook as well as muted inflation pressures,” that drove the decision to lower the fed funds target rate range by 25 basis points to 1.75%-2.00%. There was no change in the language for forward guidance.

Three dissents in the vote were notable for both the number of dissents and that these expressed opposing viewpoints. St. Louis Fed President James Bullard would have preferred a 50 basis point reduction, while Kansas City Fed President Esther George and Boston Fed President Eric Rosengren would have preferred no change in rates. It is not necessary to wait for the release of the meeting minutes on Wednesday, October 9 at 14:00 to understand that views on the FOMC are unusually divided in regard to the appropriate path for monetary policy.

Dissents of more than two are fairly rare, and dissents in which voters take different views even more so. The last time there were three dissents in the vote was at the September 20-21, 2016 meeting when George and Rosengren were joined by Cleveland Fed President Loretta Mester in favor of raising rates. There are a few examples of other times when the vote was less than-unanimous and a voter wanted to send a message. One was at the June 18-19, 2013 meeting when George wanted an immediate reduction in the asset purchase program, while Bullard wanted stronger language regarding defending the 2% inflation target. The three dissents at the December 17-18, 2014 meeting occurred when Philadelphia’s Charles Plosser was against the wording of the forward guidance, Dallas’ Richard Fisher wanted more patience before normalizing monetary policy, and Minneapolis’ Narayana Kocherlakota was concerned about the credibility of the inflation target. These three also dissented in the votes at the August 8-9, and September 20-21, 2011 meetings. It is necessary to dig back further to the early 1990’s to find other instances of a large share of dissents in the vote.

Please see the Whetstone Analysis Reference Library for a history of FOMC rate decisions and votes.

The IOER was lowered by 30 basis point to 1.80%, the discount rate was lowered by 25 basis points to 2.50%, and the overnight RRP offer rate was lowered by 30 basis points to 1.70%. Chair Jerome Powell tried to emphasize that repurchase operations undertaken by the New York Fed on Tuesday and Wednesday were due to unusual circumstances the Fed needed to address to ensure liquidity and keep the IOER near where the FOMC has set it. Powell said that further similar steps would be taken if needed.

The Summary of Economic Projections in September after June actually looked for a mildly faster pace for GDP (up to 2.2% from 2.1%), a slightly higher unemployment rate (up to 3.7% from 3.6%), no change in the PCE deflator (up 1.5% overall, up 1.8% at the core). However, the midpoint of the fed funds rate at year-end was lower five-tenths (1.9% from 2.4%). With the longer run rate at 2.5%, this would imply no more rate cuts this year and one next year.

In his press briefing, Powell asserted that the FOMC’s consensus is not for a recession, but that it is taking into account risks to the economy and acted appropriately. He sounded a bit more downbeat about the risks from trade policy, slower global growth, and geopolitical events. He declined to reuse the term “mid-cycle adjustment” but was not ready to call a second rate cut the start of an easing cycle. He continued to say that the economic fundamentals remain healthy and that the present rate reductions were undertaken to ensure things stay that way, not to address a downturn. He termed the July 31 and September 18 cuts as “moderate adjustments” and offered assurance that the Fed “will do more if appropriate”.

Powell restated that the tools the FOMC will use are short-term rates, and, if needed, more large scale asset purchases – so-called QE, or quantitative easing – and forward guidance. “We are going to use the tools we have, and if it comes to it, will use all the tools.” When asked, Powell said policymakers did not intend to add negative rates to the tool box, even if rates near the effective lower bound, but could not entirely dismiss it as a possibility.

Powell noted that the FOMC no longer uses a statement of bias for the rate outlook and would not say that policymakers have an easing bias at present.

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