November 21, 2019
An upbeat economic outlook may be edging out elevated downside risks in the Federal Reserve’s (Fed) decision-making.
Minutes from the Fed’s October meeting showed policymakers discussed both dynamics at length, as they have at several meetings this year. The Fed ended up reducing the fed funds rate by 0.25%, citing low inflation and downside risks as reasons to lower the policy rate for a third time this economic cycle.
The Fed’s evaluation of the economy and risks in October largely mirrored past meetings, but participants agreed to remove the “act as appropriate” language in the post-meeting statement. The change was seen as consistent with the view that current monetary policy was appropriate as long as the U.S. economy performs as expected, and could be changed if there is a “material reassessment of the economic outlook.” To us, that language change has been the Fed’s biggest signal that this round of rate cuts has ended.
The October rate cut was also heavily contested among Fed members. Only two voters dissented, but the minutes showed that a “couple of participants” who ultimately voted for the cut thought the decision was a “close call.”
“While pockets of the economy still looked mixed, the labor market and consumer have been largely unaffected by trade tensions,” said LPL Financial Senior Market Strategist Ryan Detrick. “The outlook has improved, and policymakers may be comfortable enough to step back from policy changes for a while.”
Of course, the Fed has promised flexibility in changing policy again if data turns or trade talks break down. This flexible messaging has helped cushion investor confidence over the past several weeks, even as the Fed has pumped the brakes on rate cuts. As shown in the LPL Chart of the Day, fed fund futures are pricing in a 60% chance of an unchanged fed funds rate through the Fed’s March 2020 meeting.
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