Last week, the Federal Reserve delivered a third rate cut. More importantly, it signaled that it was done cutting for the time being. It sees these rate cuts as insurance against a slowing in the economy rather than the beginning of a rate cut cycle.
Just like the Fed's decision to go from hiking rates in December 2018 to cutting them early this year revealed concern about the effects of the trade war, its current shift reveals confidence in the economy. Going forward, all data will be intensely scrutinized to evaluate whether the central bank got it right and to anticipate its next move.
Jobs and Services Report
The Fed is on hold for the time being as it anticipates the economy improving. Although the decision is only a week-old, early returns are positive. Friday's jobs report was stronger than expected with the economy adding 128,000 jobs above the consensus expectations of 75,000. This was despite the GM (NYSE: GM) strike which resulted in a loss of nearly 50,000 jobs.
Even more encouraging were positive revisions to job figures in August and September totaling almost 95,000 jobs. This report is consistent with the Fed's decision to stop at three rate hikes. The jobs report reflects an economy that continues to grow albeit at a slower pace. Wage growth came in at 3% on an annual basis which is in-line with expectations and consistent with current Fed policy.
The ISM's non-manufacturing Purchasing Managers' Report climbed to 54.7 in October. This marks continued expansion in the services sector of the economy and is another indication that the weakness in manufacturing is not spreading to other parts of the economy. Another signal that the Fed is on the right track.
Looking Forward
Besides the recent data which continues to show that the broader economy remains immune to a manufacturing slowdown, there are other reasons for the Fed to move to the sidelines. Part of its cuts was insurance against the trade war, and the uncertainty it was creating. Currently, trade tensions are easing as China and the US look ready to make 'Phase One' of the trade deal. It even seems possible that tariffs could be lifted which would lead to a burst of activity. Another factor is the Brexit situation has also shown improvement with a disastrous "no-deal Brexit" seemingly off the table for now.
Given that these two tail risks are no more and the economy remains solid, it makes sense that the need for 'insurance cuts' has also faded.