Federal Reserve Cuts Interest Rates Again But Pauses Future Adjustments

Topline: In a widely expected move, the Fed continued its “mid-cycle adjustment” by cutting interest rates to the 1.5% to 1.75% range on Wednesday, but also indicated that it would pause the monetary easing cycle before implementing additional rate cuts.

• The Fed concluded its meeting with Chair Jerome Powell announcing the rate cut, which will be the third this year and in line with the “midcycle adjustment” that he alluded to in July when the Fed first started slashing rates.
• The most recent decision to cut rates indicates that the Fed will pause on future adjustments, adopting a more wait-and-see approach as it “assesses the appropriate path” forward.
• Powell previously said in the July and September meetings that the Fed does not plan to enter into a prolonged easing cycle.
• In remarks earlier this year, Fed chair Jerome Powell raised comparisons to two other “mid-cycle” adjustments, in 1995 and 1998, when Alan Greenspan’s Fed slashed rates three times during both periods to successfully keep the economic expansion alive.
• Two Fed officials voted against this latest quarter point rate cut, indicating that there is still some boardroom division about the direction of future monetary policy.
• The Fed has a mixed view of the U.S. economy, which has held steady but is now showing some cracks: Manufacturing has declined, GDP is slowing (1.9% in the third quarter, down from 3.1% and 2% in the first and second quarters) and consumer spending has remained solid—although that too is starting to show signs of stress.

What to watch for: It remains to be seen whether the Fed plans on an additional rate cut later this year, perhaps in a December meeting, should looming economic risks worsen. Powell could well indicate that the Fed will now stay on hold, waiting to see whether additional monetary easing is needed to prop up the slowing U.S. economy and avert a downturn.

Key background: The current bull market, which emerged from the ashes of the 2007-2009 financial crisis, is already the longest period of sustained growth in U.S. history. However, it has increasingly come under stress from slowing global economic growth and geopolitical risks, like Brexit and the trade war with China.