The Federal Reserve has cut interest rates by another 25 basis points to 1.75%/2.00% in its meeting today. However, despite what would on the surface seem to be a dovish move, the dollar is strengthening. We look into why.
The Key Takeaways
The Fed has continued on its cutting cycle, however there are signs that the Fed remains confident about the US economy. This seems to be at odds with a central bank cutting rates. This is reflected in the dot plots and economic projections. The Fed believes that the consumer remains strong even if business fixed investment is weak. This is a reflection that the US economy is riding out the storm of the trade dispute relatively well, thus far.
There are also deep divisions on the voting of the committee, whilst the dot plots are hinting at a potential pause in the cuts.
FOMC Statement changes
Changes to dot plots
The dots have shifted to account for the two cuts that have now been made. However, it is interesting that the mean dot plot for 2019 and 2020 (down from 2.4% in June to 1.9% now) are the same as where the current rate is now in the middle of the current range 1.75%/2.00%.
It is also interesting that 5 of the dots called for no more cuts this year. There were two dissenters, but there could have been more (they were non-voters). But also there are seven calling for another cut (presumably in December).
Changes to Economic Projections
The economic projections are interestingly similar to June. That shows the Fed confidence in the domestic economy remains.
The prospect of future rate moves
It looks very much as though Powell’s “mid-cycle adjustment” of the July meeting remains viable, even though Powell is not willing to admit it. The dots and mean rate for 2019 and 2020 suggest there will be a battle to secure further cuts. This is now a very divided FOMC. This could be significantly different in December as the latest round of trade talks would have come and gone and the next phase could be underway (on the assumption that both side remain a long way apart). However, as things stand, another cut in December should not be taken for granted.
The market is taking this as a mild hawkish surprise, with yields up and the dollar gaining. The Dollar Index has gone up from 98.3 to 98.65 since the cut. Equities are also a shade weaker.
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