Quick Thoughts on the FOMC Decision
The Fed cuts by 50 basis points, so the more aggressive choice that was under consideration. They also implied there’s another 50-basis point cut coming soon. Even so, one dissent shows that this must have been significant disagreement or uncertainty over the decision.
The range of rate projections was also very wide. So, some members of the FOMC clearly think there’s a need to bring rates down sizably and soon, while others favored the more classical go slow approach to be more appropriate. With the decision seemingly a close one, future soft economic reports or further moderation in inflation could easily push the Fed to implement what seems to be an aggressive expectation on the part of a majority of the FOMC for a series of rate cuts. However, if the economic data holds up well, or even improves in part due to lower rates, the Fed might not implement all the rate cuts that it is currently planning. I only expected a cut of 25. This Fed seems a bit more worried about growth prospects.
The decision to cut by 50, despite the dissent by a Board member, suggests that Powell is one of the key players who pushed for the larger cut. He is clearly more concerned about the slower pace of job growth, so he wants to provide some additional support for the economy.
The market’s reaction was as expected to a 50-basis point cut. Money market rates dropped, since the market was not priced for 50. It was unsure, so it priced for something between 25 and 50. Longer term bonds declined slightly, as a stronger economy, which the Fed is seeking, raises the risk of inflation not declining as much as hoped.
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