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Juggling Mixed Signals, Fed Lowers Rates

At the conclusion of its September meeting, the Federal Open Market Committee voted to decrease its target rate range to 1.75%-2% from 2%-2.25%. For the third consecutive time under Chairman Jerome Powell's tenure, the vote was not unanimous, with Esther George and Eric Rosengren voting for no change to the benchmark rate. George and Rosengren previously dissented following the July meeting, and both continue to favor holding rates steady. St. Louis Fed President James Bullard also dissented and preferred a heftier cut of 50 basis points. The much anticipated Fed dot plot showed seven members favor one additional cut this year, five prefer keeping rates as-is, and five think rates would be more appropriate in the 2%-2.25% range (at least three of these voters are non-voting).

The language in the Fed's statement highlighted the continually soft business fixed investment and lower inflation, and noted uncertainties around the future outlook. In the press conference, Powell also mentioned trade policy tensions and slowing global growth as reasons for the rate cut. The Fed maintained language on acting "to sustain the expansion," indicating a further willingness to make "insurance" rate cuts. A big question for us was whether Jerome Powell still considered rate cuts to be "midcycle" adjustments. Though Powell avoided directly answering the question, we got the sense the cut was more of the midcycle variety, rather than the "beginning of a lengthy cutting cycle." We still view at least one or two more cuts over the next year as the most likely outcome.

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