• Fed funds target lowered by 25 bps as expected
  • There were three dissents: two hawkish, one dovish
  • The dot plot median points to steady rates through the end of next year, though several favour another cut

Today’s rate cut was widely expected as the Fed continues its “mid-cycle” policy adjustment (i.e. more than one cut, but not an extended easing cycle). The key question is how much further that adjustment, framed as insurance against risks from trade tensions and slowing global growth, will go. The clearest indication should come from the dot plot—it shows a median of no further cuts (or hikes) through the end of next year. But that masks significant divergence among committee members with seven expecting one more cut this year, five looking for no change, and five thinking a rate hike would be appropriate by year end. Lack of consensus might explain why the policy statement was little changed, simply reiterating that the Fed will “act as appropriate to sustain the expansion.”

Our forecast assumes the Fed will lower rates once more this year. A total of 75 basis points of cuts would be consistent with mid-cycle easing in 1995 and 1998. Whether the Fed makes that additional move will depend on how the balance of risks around the economic outlook evolves into year end. Geopolitical risk has gone both ways recently, with the US and China restarting trade talks but tensions in the Middle East rising and Brexit no closer to being resolved. Domestically, more reports like yesterday’s IP numbers (manufacturing +0.5% in August) would help alleviate concerns about the health of the US industrial sector, with the key worry being that weakness there spills over into the broader economy. More clarity on these issues would help the divided Fed reach a consensus.

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