Fed Makes Quarter Point Cut; Second this Year

Sometimes it appears as if the Federal Reserve and the
equity markets are in a game of tennis. Decisions by the
Fed can boost or depress the markets. The direction of
the markets seems to factor into the Fed’s decisions.
Both sides seem to want to keep the volley going.

Recent actions by the central bank are helping keep
the equity markets buoyant. The federal funds rate
was cut by a quarter-point. This was the second rate
cut for the year and what the markets were anticipating.

That is generally a good thing for the markets, where
predictability is rewarded. This wasn’t only the second
cut of the year, but the second rate cut since July.

Of the 17 members of the FOMC, 10 are voting
members. The voting members are considered to be
slightly more hawkish as a group. There is not a clear
consensus from all the members on what they should
do next. Because of this, the Fed has not been clear
about what they anticipate as their next move.

Fed Could Make Additional Cuts

Economists are divided on what the Federal Reserve
should be doing right now. The U.S. is still growing at
a good pace. That can’t be said of Europe or even China.

One to two more cuts this year and one to two more next
year is the opinion of some experts. These additional rate
cuts are completely dependent on what the economic
data tells the Fed in the months ahead. While the Fed
does watch the markets, it is independent of politics.

At the Fed’s recent September meeting, five FOMC
members stated that they wanted to keep the federal
funds rate at its current 1.75 to 2 percent through the
end of 2019. Seven members of the committee have
said they want an additional rate cut before year-end.
These seven members are among those with a vote.

The message coming from the Fed is that they will only
cut rates more if they feel a need to. It is no inevitable and
the Fed is telling the markets that they should not price
more cuts in at this moment in time.

Fed Chair Jerome Powell commented after the
FOMC meeting and said that the “U.S. economy has
continued to perform well.” He said that “the economy
grew at a 2.5 percent pace the first half of the year.” He
said that many of the consumer numbers looked very
strong and some manufacturing numbers had fallen
because of slower exports. That fact he attributed to
weaker economies abroad.

Powell stated that with “household spending
remaining on a solid footing, and with supportive
financial conditions, we expect the economy to expand at a moderate rate.” Powell said that FOMC members
look for annual GDP growth to be around 2 percent
this year and next.

There are two more Fed meetings before the end
of the year. With inflation rising closer to the Fed’s
target, they feel the economy is healthy. Expectations
are also that the unemployment rate will remain at
around 3.7 percent.

Stay tuned, because there are many variables that can
influence the Fed’s future decisions and many may not
be on the horizon just yet.