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The Fed Cuts and Pauses



The Federal Open Market Committee (FOMC or Fed) cut the target range for the federal funds rate 0.25 percentage point to 1.50 to 1.75 percent at its October 2019 meeting, as many analysts anticipated. Fed Chair Jerome Powell made clear in the subsequent press conference that future rate cuts are not likely unless the economy performs worse than the Fed expects. President Donald Trump has been pressing the Fed to cut rates dramatically and may be unhappy with the Fed's reluctance to do more. But in light of continuing solid economic data, it is reasonable for the Fed to pause for now. Stock prices and bond yields did not move much after the Fed's announcement.

GDP growth slowed a bit to 1.9 percent in the third quarter of 2019, but Chair Powell indicated that this rate is close to what was expected. Moreover, he noted that some of the biggest risks to the outlook, trade tensions with China and the possibility of a no-deal Brexit, appear to have diminished lately. Meanwhile, inflation as measured by the Personal Consumption Expenditures (PCE) price index, excluding food and energy (core inflation), rose slightly above target to 2.2 percent on a quarterly basis after having been below target earlier this year. Powell stressed the importance of having inflation return to its 2 percent target on a sustained basis after roughly a decade in which it averaged a bit below 2 percent.

After turbulence in the repo market in September, the Fed announced plans to increase bank reserves both by buying more Treasury bills at least through the second quarter of 2020 and by conducting term and overnight repurchase agreements through January 2020. The October FOMC statement repeated those commitments but did not go any further.

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