Fed Cuts 25bps: Is this a One-off, or the Start of a Cycle?

As widely expected, the FOMC cut the Federal Funds Rate by 25bps (to a range of 2.00 – 2.25%) for the first time since the financial crisis. Eight of the 10 Fed officials voted in favor of lowering the short-term benchmark rate; two officials (Boston Fed President Eric Rosengren and Kansas City Fed President Esther George) dissented. The FOMC also announced it would end sales from its $3.8 trillion asset portfolio on Thursday, two months earlier than previously planned. Chairman Powell stated in the press conference that the cut was a “mid-term policy adjustment” – which the market interpreted as a sign that this might not herald the beginning of an easing cycle, immediately sending stocks lower. 

We highlight that Powell has stressed multiple times that one of the Fed’s primary goals is to keep the expansion rolling. Without an inflation threat and with low global interest rates, the Fed stil has the flexibility to ease. Despite today’s market concerns that the Fed may not ease as much as expected, data from the CME (see chart below) suggest there is roughly a 91 per cent chance (up from 87 per cent yesterday) of further cuts by December, with the majority expecting an additional 50bps of easing. Furthermore, as we indicated in our recent note Is a US Recession Imminent?, 2020 is an election year and we expect President Trump to use his pulpit to gin up support from business leaders, consumers and of course the Fed to ensure the economy cruises through the election. This represents more ammo for additional rate cuts. We also point out an interesting tidbit from The Wall Street Journal, which pointed out that this rate cut marks just the fifth time in the past 25 years that the Fed switched from raising to lowering rates. In the four prior cases, the Fed has never cut rates just once.