Federal Open Meeting Committee - Photo by Federal Reserves

JAKARTA (TheInsiderStories) – As we expected the Federal Open Market Committee (FOMC) lowered the target for the federal funds rate of a quarter point to a range of 2 percent to 2.25 percent. It was the US central bank’ first rate cut in a decade.

Chairman of the Fed Jerome Powell also said that the central bank also left the door open for future cuts, saying it would act accordingly to maintain expansion because it continued to evaluate incoming data. The FOMC hinted to cut the FFR twice in this year.

The rate cut should not be viewed as the beginning of a lengthy cycle of rate cuts, or that the next adjustment in the funds-rate target will necessarily be another reduction.

Also, as expected, Presidents George (Kansas City) and Rosengren (Boston) dissented, instead favoring to make no change to interest rates. Dissents hint that there was likely a healthy discussion at this week’ meeting about the state of the economy, uncertainties and risks, and the appropriate response of policy.

In a two-days meeting, the Federal Open Market Committee (FOMC) rated, there was an implication of global developments for the economic outlook and muted inflationary pressures. The committee calls the current growth conditions “moderate” and the labor market “strong,” but decides to keep loosening policy.

This action supports the Committee’ view that continued expansion of economic activity, strong labor market conditions, and inflation near the symmetrical goals of the 2 percent. It said, the information received since the FOMC met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate.

Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation for items other than food and energy are running below 2 percent.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. As board of governors contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook.

In determining the timing and size of future adjustments to the target range for the federal funds rate (FFR), the FOMC will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.

Changes to the statement appeared to hint that the FOMC intends to keep its options open. Specifically, the modifier “closely” was dropped when describing the intent to monitor incoming information, suggesting slightly less concern about downside risks and the possibility that uncertainties will weigh on the outlook in a persistent fashion.

In our view, recent developments point to solid near-term GDP growth and some upside risks to previous projections for GDP growth in 2020 and beyond, while incoming data show a quick upturn in core inflation in the last few months that sets up a quarterly reading for core inflation above 2 percent in the third quarter.

In the context of these developments, changes to the statement suggest that the Committee has edged back — partially but not wholly — from the effective bias toward easing it adopted at the June meeting.  In short, it intends to keep its options open as it monitors subsequent developments.

The statement made on July 31 also announced that the ongoing reduction in the overall size of the Fed’ securities portfolio will end in August, two months earlier than previously indicated.  The economic impact of this decision is limited; this step was taken to avoid the possibility that pairing a rate cut with continued reduction in the size of the balance sheet could send a mixed message about the stance of policy.

by Ken Matheny and Kathleen Navin from IHS Markit