CRU: The Federal Reserve Cuts Interest Rates and Embraces Less Clarity

LONDON, Sept. 30, 2019 /PRNewswire/ -- The Fed cut interest rates at the conclusion of its meeting on 18 September 2019, lowering the Federal Funds rate by 25bp to a range of 1.75% to 2.00%.

This reduction in the Fed Funds rate was widely anticipated by markets and follows a 25bp rate cut in July. What was striking about the information transmitted following the meeting is that the Fed is willing to be less clear about the path forward, which will add even more uncertainty into the current unpredictable policy environment.

A house divided, but pre-emptive action prevails

The Fed's statement was very similar to that in July. It cited the strong labour market and continued expansion of the US economy, despite slower global growth, uncertainty in trade policy and the continued presence of geopolitical risks, like Brexit. The official September FOMC statement did highlight, however, that household spending was rising at a strong pace while business investment spending and exports were weaker.

The current Federal Open Market Committee (FOMC) has ten voting members—it should have twelve, but two appointments from President Trump have yet to be made. The minutes of the July meeting indicated a range of opinion around interest rate action, but only one FOMC member dissented from the decision to reduce rates by 25bp.

The diversity of opinion persists and in the 18 September decision there were three dissenting votes. One member wanted to cut rates by 50bp while two other members (one of whom was the dissenter in July) would have preferred no cuts at all.

Compared to the Yellen Fed, and the Greenspan Fed before that, this level of disparity in view may seem unusual. There has never been a shortage of differences of opinion on the Fed, but this much open dissent reflects that the Fed is taking a different approach in the current, high uncertainty, environment. Not only must the Fed focus on its dual mandate of low unemployment and inflation of 2%, but it also must look ahead to anticipate and mitigate the risks on the horizon.

Read the full story:

https://www.crugroup.com/knowledge-and-insights/insights/2019/the-federal-reserve-cuts-interest-rates-and-embraces-less-clarity/ 

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SOURCE CRU