Federal reserve at sunset

Various members of the Federal Reserve have been suggesting a short-term interest rate cut for a while now. What traders and other market observers were really anticipating was the language of the statement and Fed Chairman Jerome H. Powell’s comments to the press.

While the Fed did deliver the 0.25% cut in short-term interest rates markets had been expecting under Powell’s leadership, the chairman surprised them by saying there isn’t any intention to signal a coming cycle of rate cuts. Instead, he referred to it as a mid-cycle adjustment.

Regardless, if you’re in the market for mortgages, rates are still in a great spot. If you’re in the market to refinance or purchase, it’s a really good time to lock your rate.

But what goes into those Fed decisions? For that, you can gain key insights from their statements. My analysis is in bold.

Information received since the Federal Open MarketCommittee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Once again, the Fed leads with the report card on the U.S. economy. The Fed changed a few verbs around from last time. The Federal Open Market Committee (FOMC) replaced “appears to have” with “has.” (Believe it or not, markets around the world notice this kind of stuff and as a result millions or billions of dollars of bonds trade.) The Fed gives the U.S. economy an A- on job growth, an A- on household spending (that’s dough you and I spend at stores and whatnot), a C+ on business investment (get it together, businesses!) and a B- on inflation (the Fed wants prices to increase a bit more, interestingly). All in all, the Fed is taking the U.S. economy to the ice cream shop, but Uncle Sam isn’t getting the banana split since it didn’t get all A’s. A simple chocolate-covered ice cream bar will have to do.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

Here’s where the Fed tells how they do their job and this is where the “money line” hits (conveniently italicized for you). For the first time since the financial crash back in 2008, the Fed cut short-term interest rates! I’ve included a bonus graph (no extra charge) so you can see how the Fed has been inching short-term rates higher for a few years but reversed course today. Why? Because the Fed got a little nervy. While it believes the economy is still doing well, the Fed thought to give it a little boost. When the Fed lowers short-term rates, it makes it cheaper to borrow money. When people borrow more money, they spend more money. When they spend more money, more stuff is needed. When more stuff is needed, more people are hired to make the stuff. That’s how lowering rates can lead to more jobs. There you go: Econ 101 in a few short sentences.

Federal funds rate graph July 31, 2019

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

We, the Fed, will look at numbers, data and other nerdy stuff to make future decisions.  I’m not sure why the Fed feels it’s important to say that every time. Maybe it writes press releases like I wrote college papers; more words always felt better.

The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.

For those keeping score at home, this is new information and kind of a technical thing. I know – excellent explanation. You’re welcome.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.

Not all of the Fed members agreed!  Esther George and Eric Rosengren didn’t want to cut rates. Word on the street is they aren’t too happy with the direction of the decision.

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