The Federal Reserve cut US interest rates by 25 basis points, to a range of 1.75 to 2 per cent and signalled that it could stop there despite uncertainty over trade and fierce pressure from the White House for more accommodation.
The one-notch cut was in line with the expectations of investors and economists, but its projections show a more hawkish line than markets had anticipated. Futures data compiled by Bloomberg before the meeting showed that investors had expected two more cuts by the end of 2020.
The Fed left the language from its July policy statement largely unchanged. It noted that business investment and exports had weakened, but said as it had over the summer that it would “act as appropriate to sustain the expansion”.
Amid rising disagreement among the Federal Open Market Committee over changing economic conditions, there were three dissents. Jim Bullard, president of the St Louis Fed, preferred a steeper cut of 50 basis points. As in July, Esther George and Eric Rosengren voted to keep the rates unchanged.
"It is a bit of a hawkish cut since you had those dissents," said Seema Shah, a chief strategist at Principal Global Investors. "Markets may have been expecting more given what happened over the weekend with oil markets, and that is why equity markets are not reactive in a particularly positive way," referring to the spike in oil prices since Saudi Arabia's oil facilities were attacked.
The meeting followed several days of market disruptions, as returns on overnight lending spiked as high as 10 per cent on Tuesday. Analysts had expected either a more explicit repurchase facility to keep rates within target, or even increased asset purchases to increase the level of bank reserves in the system. In declining to offer either of these, the Fed signalled that it is still considering its response to the volatility in overnight lending.
US unemployment rate
Since trade rhetoric heated up at the end of 2018, Fed policymakers have been open about the difficulty of finding clear signals in economic data. The US unemployment rate has continued to drop, and at 3.7 per cent is as low as it has been since 1969.
Manufacturing production has been dropping for a year, though it recovered slightly in August. Though manufacturing represents only 11 per cent of GDP, the Fed has signalled in speeches and research that it is concerned that uncertainty over trade has been weighing on business investment.
The Fed's hesitance to publicly signal that it was worried about a recession became a communications challenge after its July meeting, when the Fed chairman Jay Powell described a 25 basis-point cut as a "mid-cycle correction," disappointing investors who had expected more dovish language.
US Treasuries lost earlier gains following the Fed’s widely expected cut, with the yield on the 10-year note climbing to 1.775 per cent. The yield on the policy-sensitive two-year note jumped from 1.66 per cent to 1.72 per cent.
US stocks slipped, with the S&P 500 down 0.7 per cent and the Dow Jones Industrial Average down 0.6 per cent. Meanwhile, the dollar rose against its peers on the news.
In his last public statement before the meeting, Mr Powell had described the outlook as "murky". The White House was not so ambivalent. Donald Trump has repeatedly taken to Twitter to harangue Mr Powell and demand rate cuts as big as 100 basis points. "Jay Powell & the Fed don't have a clue," the president wrote on Monday. "Big Interest Rate Drop, Stimulus!" – Copyright The Financial Times Limited 2019