The Federal Reserve left interest rates unchanged at the conclusion of its two-day policy meeting on Wednesday, but strongly hinted that rate cuts could begin as early as the next meeting in March.
Fed Drops Promise of “Further Gradual Increases”
In its post-meeting statement, the Fed removed language from December that indicated “some further gradual increases” in interest rates would likely be warranted. This signals the Fed will pause rate hikes for now as it monitors economic data and developments.
While not explicitly promising rate cuts, Fed Chairman Jerome Powell stated “the committee is prepared to adjust policy quickly and flexibly,” leading markets to price in a rate cut by June. [1]
“The committee is prepared to adjust policy quickly and flexibly and use all of its tools to support the economy should that be appropriate to keep the current economic expansion on track, to keep the labor market strong and to keep inflation near its symmetric 2% objective over the medium term,” Powell said.
The Fed also lowered expected GDP growth for 2019 down to 2.3% from 2.5% in December. Unemployment expectations were slightly increased to 3.7% from 3.5%. [2]
Key Reasons for Potential Rate Cut
- Slowing Global Growth: Trade tensions, weakening economies abroad, and market volatility convinced the Fed it needs to be cautious on rate hikes that could hamper domestic growth. [3]
- Falling Inflation: Lower energy prices and import costs have caused inflation to drop, giving the Fed room to stimulate growth.
- Market Signals: Equities markets, long-term bond yields, and other indicators are forecasting slower growth, putting pressure on the Fed.
“The case for raising rates has weakened somewhat,” Powell said. The Fed seems focused now on risks that impede the economy, rather than overheating and excessive inflation. [4]
Market Reaction
The major stock indexes rallied over 1% to new highs after the Fed’s announcements as investors cheered the more “dovish” tone. [5]
Yields on 10-year Treasury notes also fell sharply, reaching 2.69%, as traders priced in rate cuts later this year.
The US dollar index dropped over 0.7% as well on a weaker outlook for the dollar with easier Fed policy. [6]
What Happens Next?
Economists now believe the Fed could cut interest rates at its next meeting on March 20 or shortly after if economic data remains weak. Markets are pricing in about a 60% chance of a rate cut by June. [7]
Further policy easing would aim to offset drags from slower global growth, the trade war, Brexit uncertainty, and market volatility in order to keep the near-record economic expansion going.
“Should the economy slow more abruptly, the committee could quicken the pace of cuts back toward the crisis-era levels,” said Roberto Perli, an economist at research firm Cornerstone Macro. [8]
Here is what to watch for to anticipate the Fed’s next move:
| Indicator | Status | Impact if Decline Continues |
|---|---|---|
| Jobs Growth | Remains strong | Could prompt rate cut |
| Inflation | Dropped below 2% target | Room for Fed to cut |
| Manufacturing | Contracting | Would weaken growth outlook |
| Consumer Spending | Growing over 3% | Key pillar of economy |
Table 1: Key economic indicators for gauging timing of potential Fed rate cut. (Sources compiled from provided links)
If weak spots like manufacturing and inflation continue declining, expect a March or April cut. But if job gains and consumer spending hold up, hikes could get pushed out until the summer.
Either way, the economy still looks relatively solid and the outlook remains positive overall. The current expansion just exceeded 10 full years – the longest ever – showing impressive resilience thanks to proactive Fed support.
Long-Term Concerns
While the immediate focus is getting ahead of potential near-term weaknesses, there are a few long-term risks worth monitoring as well:
- How many times can the Fed effectively cut rates to stimulate growth before it runs out of ammunition, given that rates are still historically low overall?
- Rising federal deficits and debt levels could hamper Congress’ ability to provide fiscal stimulus and force politically difficult decisions down the road.
- An aging population, lackluster productivity growth, and other structural drags could constrain the economy’s expansion potential long-term.
However, the US remains flexible, dynamic, and entrepreneurial enough to overcome these challenges as it has for over two centuries through varying cycles and leadership regimes.
With deft guidance from the Federal Reserve, there is good reason to believe the current economic expansion – already the longest ever – can be extended at least awhile longer. The Fed has shown a willingness to support growth when needed, but also prevent overheating, using a range of tools.
As long as job gains and consumer activity continue apace, the Fed can combat external risks and weaknesses in other sectors, thereby extending the economy’s remarkable run. Exact timing of rate moves depends on data, but markets are counting on at least small cuts this year if conditions warrant.
That is the overall picture based on reviewing analysis and statements from key Fed decisionmakers over recent days and weeks. The central bank is closely attuned to downshift risks, prepared to act, and committed to both maximum employment and price stability over the medium term.
Stay tuned for ongoing coverage as this situation develops!
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
