Aug 01, 2019
The Federal Open Market Committee (FOMC) cut the target range for the fed funds rate by 25 basis points to 2.00% to 2.25%, which was more widely expected than any other possibility. That might be disappointing at first blush for participants wanting a 50-basis points cut and disappointing for participants who didn't think a rate cut at all was warranted.
Two Fed officials shared the latter view. Boston Fed President Rosengren and Kansas City Fed President George dissented with a preference to keep the target range for the fed funds rate at 2.25% to 2.50%.
In addition to the rate cut, it was also determined that the Fed's balance sheet reduction efforts will end in August, two months earlier than previously indicated. Effective August 1, the Open market Desk at the Federal Reserve Bank of New York will roll over at auction all principal payments from the Fed's Treasury securities and reinvest all principal payments from the Fed's holdings of agency debt and agency mortgage-backed securities received during each calendar month.
The knee-jerk response to the policy directive, which cited uncertainties about the economic outlook and inflation running below 2%, was negative. That, too, was not surprising since a 25-basis points cut was already priced in and there was no overt hint in the directive that market participants can expect another rate cut soon, although it was conceded by the Fed (again) that it will act as appropriate to sustain the expansion.
In other words, the Fed will be data dependent, which means there is going to be heightened fluidity in the handicapping of the Fed's next move with every passing piece of economic data. That sounds like a recipe for a choppy stock market.
Treasury yields have come down further in the immediate wake of the Fed's decision and balance sheet announcement.
Federal Open Market Committee
Wednesday 31 July, 2019