The Confusing Federal Reserve Message
This week, the Federal Reserve lowered interest rates by a quarter percent. They stated in the release of minutes the conflicting data and the differing opinions regarding future interest-rate policy. The messaging was confusing and not definitive.
The Federal Reserve continues to be divided and perhaps that’s where some of the confusion comes from. A recent CNBC article highlighted the differences of opinions after this week’s rate cut. In particular, one Federal Reserve governor believes that rates should have been cut more than a quarter percent. His concern is that a recession may be on the horizon without aggressive Federal Reserve action.
St. Louis Federal Reserve Bank President James Bullard said he argued for a deeper rate cut than his colleagues approved earlier this week because he fears that the economy is slowing and manufacturing “already appears in recession."
Separately, Boston Fed President Eric Rosengren also explained his dissent, which came not because he wanted even lower rates but rather because the thought the central bank did not need to adjust rates at all. Rosengren said he worried that pushing rates lower risked inflating asset prices and household debt.
The policymaking Federal Open Market Committee on Wednesday approved a 25 basis point cut that took the target range for the central bank's overnight borrowing rate to 1.75% to 2%.
Source: September 20, 2019, CNBC.com article by Jeff Cox
Interest rate policy is a very important data point that we monitor closely. It is a point of discussion often in our investment committee and investment policy meetings that occur on a weekly basis.
Our view on interest rate policy is as follows:
- The federal reserve will not reduce the interest rates any further in 2019.
- 1/4-point reduction in the first quarter of 2020 may be implemented if the holiday season turns out particularly difficult.
- Trade negotiations will impact federal policy decision making.
- We continue to believe the odds are less than 50% that US will fall into recession. A recession will be a sure trigger for additional federal reserve action.
We are at a wait-and-see moment regarding interest rates; it all depends on the trajectory of the economy. There is additional uncertainty moving into an election year in 2020; and deciphering future actions will be difficult. We have already adjusted portfolios based on the points listed above. We will make further adjustments if we feel it is necessary. We are watching!
If you have any questions about this information, please let us know. Always here to help.