After Three Cuts in a Row, Is the Fed Done Easing?

Fed Chair Powell signaled that another “insurance” rate cut is unlikely. Instead, further rate cuts are contingent on a more material deterioration in the economic outlook.

As was widely expected, the Federal Reserve on Wednesday announced another quarter-point cut in the policy rate (down to 1.50%–1.75%) – the third such cut in as many meetings – along with a parallel downshift in the rate of interest on excess reserves (IOER) to 1.55%.

The surprise for markets was in Fed Chair Jerome Powell’s press conference statement that monetary policy is “likely appropriate” at today’s level barring “material” deterioration in the outlook, which we interpret to mean that further so-called insurance cuts are unnecessary. Instead, more accommodation is now contingent on a more material deterioration in the economic outlook.

Still, it may not be a particularly high bar for the Fed to downgrade their outlook, since their 2% 2020 growth forecast is currently above both consensus (1.7%) and PIMCO’s forecast (a 1.25%–1.75% range). Therefore, despite the messages from Wednesday’s meeting, we think more accommodation may still be needed in the quarters ahead.

Interpreting the Fed’s hawkish messages

Despite the more hawkish messages on easing in Powell’s prepared remarks, his comments were more balanced during the Q&A. He focused on lingering downside risks to the economy, while suggesting that the bar for rate hikes is quite high. According to Powell, “We would need to see a really significant move up in inflation that’s persistent before we would consider raising rates.”

Overall, we believe the bar for further cuts is much lower than that of hikes, and a prolonged period of steady rates is predicated on an outlook that we believe may be too upbeat.

Changes in the Fed statement were modest but hawkish: Prior statements said the Fed “will act as appropriate to sustain the expansion”; this was changed to “will continue to monitor … the economic outlook as it assesses the appropriate path” for the policy rate (emphasis ours). This suggests a shift away from immediate action.