- As widely expected, the Federal Reserve delivered its third consecutive 25 basis point rate cut at the monetary policy meeting on October 30th, which lowered the targeted range of the fed funds rate to 1.50%-1.75%.
- In a somewhat hawkish-leaning development, the accompanying statement removed the phrase that the Fed “will act as appropriate to sustain the expansion” and replaced it with a more neutral-leaning statement that reads “the Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate” – which we believe has left the door open to another move if necessary/should the macroeconomic situation deteriorate.
- In the press conference that followed, Chair Powell reinforced this view and conveyed a message of flexibility by pledging to act “if developments emerge that cause a material reassessment of our outlook” – again not fully closing the door on further action (if warranted) and leaving their options open for now.
- Chair Powell raised the threshold for further rate cuts and signalled that the Fed will likely take a pause by stating that monetary policy is “in a good place” while also saying that the current stance of monetary policy is likely to “remain appropriate.” He went a step further and said that risks have moved in a “positive direction” and highlighted the benefits of a potential Phase 1 US-China trade deal and the diminishing odds of a disorderly no-deal Brexit. As the last three rate cuts (aka “insurance”) were primarily in response to these global “crosscurrents” at hand, signs of abating global headwinds also signals that the Fed’s work may now be done.
- Meanwhile, Powell set the bar for rate HIKES even higher by stating that the Fed would need to see a “significant move up in inflation that’s persistent before we can even consider raising rates.”
- Taken together, the Federal Reserve struck a very careful balance at the October gathering and appears to have appeased both the hawks and the doves. While indeed acknowledging that headwinds have receded and that monetary policy is in a “good place” (signalling the end to the mid-cycle policy adjustment), Chair Powell cushioned the blow and stuck to the script of acting pragmatically and cautiously going forward, with the subdued and non-threatening inflation backdrop ultimately providing the Fed the leeway to monitor the incoming data and the macro environment before making its next move. In other words, the Fed is not on a predetermined policy path.
- We continue to believe that the Fed will ultimately follow the path resembling that of the 1998 mid-cycle policy adjustment and that the threshold for further easing remains high – particularly as the global “crosscurrents” that were primarily responsible for the Fed’s dovish pivot earlier this year have largely subsided, allowing the Fed to assume a sidelined approach for now.
Candice Bangsund, CFA
Vice President and Portfolio Manager, Global Asset Allocation
