On Wednesday, the Federal Open Market Committee (FOMC) cut rates for the third time this year to set the Federal Funds rate between 1.50 and 1.75%. In Federal Reserve Chairman Jerome Powell's comments, he made it clear that the Fed would only cut rates further if the economy materially weakened.
Powell also commented that the economic data has modestly strengthened since September. Additionally, many of the risks which the Fed was combatting, when it decided to start cutting rates, have failed to materialize. These include economic risks like slowing global growth affecting broader parts of the economy and political risks like the trade dispute or Brexit. Both situations have shown signs of significant improvement over the last couple of months.
On the Sidelines
The instant reaction to the statement was a drop in stocks and a spike in bonds as many were hoping that the Fed was embarking on a new hiking cycle rather than a "midcyle adjustment". Instead, rate cuts were characterized as insurance against recession.
A rate hike is also not coming anytime soon for a variety of reasons including the Fed not wanting to lose credibility, not wanting to look like its choosing sides in the midst of an election, and continued underperformance in inflation. In recent months, Powell has also mentioned the need to let inflation run above target levels to undo the many years it has run below target.
Two Dissents
Two of the more hawkish FOMC members - Boston Fed President Eric Rosengren and KC Fed President Esther George - continued to dissent against rate cuts, expressing concern about financial stability risks. Notably, both are due to become nonvoting FOMC members in 2020.
One of their replacements will be Minneapolis Fed Chair Neel Kashkari who has consistently been one of the most dovish voices on the Fed with this insistence that the labor market is far from full employment.
Positive Situation for Stocks
In a sense, this FOMC stance is liberating for stocks
Stocks rallied to close out the week at new, all-time highs following better than expected labor market and manufacturing data. The data continues to paint a picture of an economy with solid fundamentals but a manufacturing sector in recession.
