Fed Cuts Rates by 25bps, as Expected

Stockholm (NordSIP) – On Wednesday July 31st, the US Federal Open Markets Committee decided to lower its policy Fed Funds rate by 25bps to a target range of between 2% and 2.25%. The decision was the first time since the financial crises that the fed cut rates and put an end to the tightening cycle that had been the mainstay of the Fed’s policy since the end of 2015.

“Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate,” according to the press release. “Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

The decision was widely expected. “The Fed signalled at the June FOMC meeting that interest rates are likely to be cut over the coming quarters,” said Anders Bergvall, Senior Economist for the USA at Handelsbanken Capital Markets at the beginning of July. “Markets are currently pricing in a high probability of a rate cut in July. It is shaping up to be a close call, but we suspect that a first 25bp cut will be on July 31. Overall, we anticipate that the Fed to cut rates by a cumulative 75bp, at a quarterly pace until early next year.”

Ahead of the meeting, Eric Lascelles, Chief Economist at RBC Capital Management also noted that the market had fully priced a rate cut. “This is an important fact, as the Fed does not like to deliver big surprises. This is not to say that the market leads the Fed around by the nose,” he explained. “Instead, the Fed carefully leads markets toward a particular conclusion by leaning into market expectations in one direction or another until the correct hypothesis has been formed. Thus, we can be reasonably confident that market expectations will be fulfilled.”

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