A Hawkish Rate Cut? No.

September 18, 2019 5:45 PM
Photo Credit: 
PIIE/Jeremey Tripp

The Federal Open Market Committee (FOMC or Fed) cut the target for the federal funds rate 0.25 percent at its September 18 meeting to a range of 1.75 to 2 percent, as widely expected. However, the newly released median projection of FOMC participants has no further cuts in place this year or next. Financial markets had been hoping for at least one more cut this year and interpreted the median projection as a hawkish sign. The markets have it wrong, however. A correct interpretation of the projection materials shows that at least one more cut this year is likely.

The key point to remember is that not all participants can vote. There are 17 participants but only 10 voters. (Votes rotate each year among the Reserve Bank presidents.)

Of the 17 participants, five said they wanted to keep the funds rate where it was before September. Two of these voted against the September cut (Esther George of Kansas City and Eric Rosengren of Boston). The other three presumably are not currently eligible to vote, or they would have voted no.

Five participants wanted to see one cut before year end; this group contained the median projection. Seven participants, the biggest group, wanted to see two cuts. Eight voters are split among the latter two groups. Five of these eight voters are on the Board of Governors in Washington; these voters tend to be on the dovish side. A sixth voter is James Bullard of St. Louis, who explicitly dissented in favor of a larger cut in September.

It is possible that six or seven voters are among those who want another cut, a clear majority (see figure). Even if only four or five voters are among those who want another cut, it is possible that some of those who said they wanted only one cut are persuadable to make another cut but were not prepared to make that their baseline projection. Altogether, the odds favor another rate cut this year.

Not all FOMC participants vote