• As expected, the Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 2.25-2.50%. The decision was not unanimous however, with Bullard dissenting in favor of a 25 basis point rate cut.
  • However, FOMC officials did downgrade their assessment of current economic conditions. The statement still characterized the labor market as strong, and growth of economic activity as “moderate”, but noted that indicators of business fixed investment have been soft.
  • The statement also acknowledged that uncertainties around the outlook have increased. Reference to remaining “patient” is gone. In its stead, the committee will now “closely monitor” the implications of incoming information and “act” as appropriate to sustain the expansion.
  • Not surprisingly, the median FOMC members does not expect to raise rates any further over the forecast horizon, a notable decrease from March. The majority of FOMC members expect to keep rates steady in 2019, but it is a narrow majority, with 8 of 17 expecting to lower rates this year. The majority do expect to be lowering rates next year, before raising them back up to current level in 2021.
  • The FOMC notably lowered its expectation of the “longer run” fed funds rate by 25 basis points to 2.5%, right where the upper limit is now.
  • These lower rate expectations were consistent with a lower inflation forecast. Relative to the previous Summary of Economic Projections in March:
    • The median projection for real GDP growth in 2019 was unchanged at 2.1%. However, 2020 was revised up (2.0% from 1.9%), likely reflecting the median expectation for a rate cut. The expectation for growth over the longer run was unchanged at 1.9%.
    • The median unemployment rate forecast was lowered over the forecast horizon, including the longer run expectation, which now sits at 4.2% (versus 4.3% in March).
    • Most importantly, the median estimate for core PCE inflation was revised down in 2019 (1.8% from 2.0%) and 2020 (1.9% from 2.0%). Although easier monetary policy is expected to lead inflation to rise back at the 2% target in 2020.

Key Implications

  • Few expected the Fed to cut rates today, but there was a remarkable shift in the number of members who expect the next move in interest rates will be down. And the most dovish member, Bullard, dissented on the decision, believing the Fed should have cut rates at this meeting. The majority of members expect to cut rates 25 basis points next year, with the median dot for 2020 50 basis points lower than its March level.
  • We have recently shifted our own forecast in favor of Fed rate cuts given increased uncertainty in the global economic outlook, thanks largely to tensions on the trade front. Today’s projections make clear that the Fed is not too far away from our own view, and has committed to “act” if need be. We will listen to the press conference closely to see how the Chair is thinking about the uncertainty and risks stemming from the U.S.’s aggressive stance on tariffs, and whether a positive outcome at next week’s G20 meeting might mean for the outlook.

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