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Major Moves
The Federal Open Market Committee (FOMC) wrapped up its latest monetary policy meeting this afternoon with a gift for Wall Street. It hinted as aggressively as it possibly could, without explicitly stating it, that it is open to cutting rates in 2019.
Of course, the FOMC doesn’t want to lock itself into anything just yet so it is trying to be somewhat coy while flirting with a more accommodative monetary policy.
Here’s what happened.
The FOMC started off with a classic economic on-the-one-hand-but-on-the-other-hand set up in its monetary policy statement.
On the positive side, the Committee said, “Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.”
On the negative side, the Committee said, “…indicators of business fixed investment have been soft.”
Having covered both their bullish and bearish economic bases, the FOMC left the target range for the Federal Funds rate unchanged at 2.25%-2.50% for now.
The group then started to lay the groundwork for potential rate cuts in the future by providing three key hints.
Hint #1 came in the monetary policy statement. The statement said, “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion…” This is a huge hint because the FOMC typically sustains economic expansion by cutting rates.
Hint #2 came in the votes. For the first time this year, a member of the FOMC – James Bullard – voted to lower the target range by 0.25%.
Hint #3 came in the economic projections. The Committee slashed its Federal Funds rate expectations for 2020 from 2.6% to 2.1% and cut its inflation projections for 2019 from 1.8% to 1.5% (see the table below).
When you put it all together, the FOMC did everything it could to prepare Wall Street for a potential rate cut at the July monetary policy meeting. Or if not at the July meeting, at least before the end of the year.
As I said in the title of today’s post, this was a surprise to nobody, but it was a necessary confirmation. Stocks have risen the past few weeks with the expectation that interest rates are going to drop and trade relations between the United States and China are going to improve.
Seeing at least one of those expectations confirmed should provide more bullish fuel for the up-trending fire in equities.
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