Fed scraps 'patient' rate approach in prelude to potential cut

Fed scraps 'patient' rate approach in prelude to potential cut
Though policy makers didn't alter their target rate, the change in wording seemed to pave the way for an easing move later this year.
JUN 19, 2019
By  Bloomberg

The Federal Reserve indicated a readiness to cut interest rates for the first time in more than a decade to sustain a near-record U.S. economic expansion, citing "uncertainties" in their outlook. While chairman Jerome Powell and fellow policy makers left their key rate in a range of 2.25% to 2.5% on Wednesday, they dropped a reference in their statement to being "patient" on borrowing costs and forecast a larger miss of their 2% inflation target this year. While inflation near the goal and a strong labor market are the most likely outcomes, "uncertainties about this outlook have increased,'' the Federal Open Market Committee said in the statement following a two-day meeting in Washington. "In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion." The FOMC vote was not unanimous. St. Louis Fed President James Bullard dissented in favor of a quarter-point rate cut. His vote marked the first dissent of Mr. Powell's tenure as chairman. Policy makers were starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of the year, while another eight saw no change and one forecast a hike, according to updated quarterly forecasts. In the statement, officials downgraded their assessment of economic activity to a "moderate" rate from "solid" at their last gathering. The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that President Donald J. Trump's trade war is slowing the economy's momentum and that rates are too restrictive given sluggish inflation. The change in tone follows attacks on the Fed by Mr. Trump for not doing more to bolster the economy and Tuesday's report that the president asked White House lawyers earlier this year to explore his options for demoting Mr. Powell from the chairmanship. That risks casting a political shadow over whatever policy decision the Fed makes, though Mr. Powell and his colleagues say they're focusing only on the economic goals Congress gave them. Officials noted that "growth of household spending appears to have picked up from earlier in the year" and that indicators of business fixed investment "have been soft." They repeated that the labor market "remains strong." Investors have been betting the Fed will reduce rates at its next meeting in late July, though a majority of economists surveyed earlier this month don't expect a move until December. Yields on 10-year Treasuries have fallen to the lowest since 2017. The hope of fresh stimulus has sent U.S. stocks to near a record. (More: What the market rebound is telling investors)​ Recent U.S. economic data have been mixed. Consumer spending held up in May but job gains were disappointing, and some gauges of business sentiment have cooled on uncertainty around the outlook for trade. The Fed remains bedevilled by inflation that continues to undershoot the central bank's 2% target despite unemployment being at a 49-year low. Central bankers are likely hoping for greater clarity over Mr. Trump's trade war with China. Stocks jumped on Tuesday after the president said he would meet Chinese leader Xi Jinping at next week's Group of 20 summit in Japan. The Fed, which raised interest rates four times last year and as recently as December projected further hikes in 2019, isn't alone in shifting tack. European Central Bank President Mario Draghi on Tuesday paved the way for a rate cut, and central banks in Australia, India and Russia have lowered borrowing costs this month. (More: Fixed-income focus: Beware ending up with the 'ultra-short' straw)

More from Fed

• The median projection for 2019 GDP growth was unchanged at 2.1% and revised up by a tenth of a point to 2% in 2020. The 2021 estimate was held at 1.8%. • The median unemployment rate forecasts for 2019 through 2021 were all lowered by a tenth of a point. Officials see a 3.6% rate this year rising to 3.7% next year and 3.8% in 2021. • Officials see the jobless rate most consistent with full employment in the long run at 4.2%, versus 4.3% in March. • Officials cut estimates for their preferred inflation gauge. The personal consumption expenditures price index is expected to increase just 1.5% in 2019, down from a 1.8% projection in March. By 2020, the main and core gauges are both projected to rise 1.9%, below the target.

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.