Fed cuts rates and makes further ‘technical adjustment’

Fed doesn’t see funding pressure episode having implications for its ability to control rates
Jerome Powell
Jerome Powell
Federal Reserve

The Federal Reserve reduced its policy rate today (September 18), but policy-makers were not all in agreement on the final decision.

The central bank also made a further “technical adjustment” to the tools it uses to influence its target rate.

The majority of voting Federal Open Market Committee members – seven out of 10 – voted to reduce its target range by 25 basis points to 1.75–2%. St Louis Fed president James Bullard, however, was in favour of a 50 basis point reduction, while Kansas Fed president Esther George and Boston Fed president Eric Rosengren voted to keep rates unchanged.

“This is a time of difficult judgement, as you can see in the different perspectives,” chairman Jerome Powell said in the press conference. “But I really do think this is nothing but healthy.”

The dot plot shows seven participants expect rates to fall to 1.5–1.75% before the end of the year, with five expecting rates to remain the same and five expecting rates to rise by 25 basis points.

Powell said the committee’s decision was appropriate in light of the economic developments since the July 31 meeting.

“Global growth has continued to weaken – I think it has weakened since our last meeting – and trade developments have been up and down and then back up again,” he said. “We do see those risks as quite heightened now.“

Year-on-year inflation rose 0.1 percentage points to 1.4%, and core inflation stood still at 1.6%, the latest data release shows. Both figures remain below the Fed’s 2% target. The committee expects inflation to rise to 1.9% by the end of the year, and to 2% in 2020.

The job market showed signs of slowing somewhat in August, with 130,000 new jobs added to the US economy, compared to 159,000 positions created in July. Unemployment was unmoved at 3.7%.

President Donald Trump was again unimpressed by the Fed’s decision to cut rates by 25 basis points, tweeting “Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!”

He has recently called for the Fed to cut rates to zero and restart quantitative easing.

Fourth technical adjustment

The FOMC made a further ‘technical adjustment’ to the interest it pays on excess reserves (IOER), reducing it 30 basis points to 1.8%. IOER will now sit 20 basis points below the upper bound of the target.

The move – which is the fourth technical adjustment the Fed has had to make in recent years – was aimed to keep federal funds rate within the target range. The central bank also lowered the rate on the overnight reverse repurchase facility to 5 basis points below the bottom of the target range.

Before the rate announcement, the federal funds rate breached the upper bounds of the Fed’s target range, hitting 2.3%. The volatility follows two days of short-term funding pressure, forcing the New York Fed to inject over $75 billion of liquidity into the system today, following the $53 billion supplied on September 17.

Regarding the recent funding pressures, Powell admitted “it was a stronger response than we expected”. He added he “was not concerned”, however, about the Fed’s and New York Fed’s ability to control rates.

“We don’t see this [episode] as having any implications for the broader economy or the economic outlook, nor for our ability to control rates,” he said. “If we experience another episode of pressures in money markets we have the tools to address those pressures and we will not hesitate to use them.”

He said the Fed will ensure “a sufficient supply of reserves so that frequent operations are not required”. He later said that the FOMC will be looking into when it will be appropriate to start “organically” expanding its balance sheet again, saying it may be sooner than the committee originally expected.

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