Home Central Banks Powell Leaves Room for Third Rate Cut

Powell Leaves Room for Third Rate Cut

Stockholm (Ekonamik) – For the second time in 2019, the Fed cut its fed funds target policy rate by 25bps. Following a cut in July, the FOMC decided to cut rates from between 2.25% and 2% to between 2% and 1.75% at the September meeting. The rate cut was widely expected.

“This action supports the Committee’s view that sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain,” explained the accompanying press release. “As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric 2 percent objective.”

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“Several Fed policymakers (but not the majority) expected a third rate cut before year’s end,” commented Thomas Costerg, at Pictet Asset Management. “Indeed, Powell, referring to the “successful” insurance rate cuts pushed through by then Fed chairman Alan Greenspan in the 1990s, who explained at the time that cutting rates would help to boost the economy via ‘higher asset prices’. This why we think Powell may go for a third rate cut at the next Fed meeting on 30 October.”

Powell downplayed the recent instability in the money markets, seeing “no implication” for US monetary policy or the growth outlook. “Nonetheless, he opened the door to boosting the level of bank reserves at the Fed (which will likely happen via fresh Treasury purchases)—potentially as soon as the next Fed meeting if liquidity issues persist,” Costerg added.

“Once again, Esther George and Eric Rosengren, dissented and preferred to keep the federal funds rate unchanged. Meanwhile James Bullard wanted to see a larger cut with 50 bps,” commented Robin Ahlén, Analyst at Swedbank Research. “We stick to our view of two further rate cuts in December this year and March next year as we continue to see the US economy slowing. But as we believe the domestic economy to hold up relatively well we do not foresee significantly more rate cuts. The forthcoming development will be highly dependent on incoming data and the development of risks to the economic outlook, and the FOMC will take on step at a time.”

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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