Federal Funds Rate Target Cut and Controlled Reduction of Fed Balance Sheet Suspended Two Months Sooner than Planned

July 31, 2019

The Federal Open Market Committee opted for a 25-basis point interest rate cut, not the 50-bp that some had urged. The released statement also revealed a decision to “conclude the reduction of its aggregate securities holdings in the
System Open Market Account in August, two months earlier than previously indicated.”

The Committee was divided in how aggressively to respond to global headwinds that cast its comparatively bright baseline U.S. outlook in some doubt. Eight of ten voting committee members supported the two announced monetary policy actions, but Eric Rosengren, president of the Boston district, and Esther George of the Kansas City Fed dissented against easing and in favor of keeping the existing stance. Also, the statement makes clear that today’s action doesn’t represent a change in the baseline forecast of “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective” but rather as insurance against the baseline proving overly optimistic. Uncertainties remain regarding the implications of global headwinds on the Fed’s outlook. Interestingly, future policy modification are not so much data-dependent as that such will be information-dependent. This introduces an extra margin of policy subjectivity that allows for further rate cuts even if the baseline forecast doesn’t change.

Chairman Powell’s press conference is now beginning. There was not much initial market reaction to the FOMC statement.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission. 



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