FOMC: Pause after three interest rate steps

As expected, the US Federal Reserve again lowered its key interest rate corridor by 25 basis points yesterday evening. This was the Fed’s third interest rate move this year. FOMC members Rosengren of the Boston Regional Fed and George of the Kansas City Regional Fed did not support the interest rate decision. The central bank again justified the monetary policy measure with global developments and subdued inflation. Overall, the introductory section of the Fed’s press release was hardly changed. It merely pointed out that export activity was weak. However, the situation on the labour market remained robust and the economy developed moderately. The explicit announcement that the Fed would act to maintain economic expansion with a strong labour market has been dropped.

The press conference was quite unspectacular. After a brief assessment of the economic situation, which was quite optimistic, the Fed Chairman gave a brief explanation of the liquidity measures. In particular, he explicitly pointed out that these should not be equated with quantitative easing. In addition, Powell put on record that the Fed had probably achieved its goal of prolonging economic development. At the same time, he stressed the appropriateness of the current monetary policy, which must be assessed against the background of the delay in the latest monetary policy measures. As long as the economy develops as expected by the central bank, there is no concrete need for action by the central bank. Only a fundamental reassessment of the economic development would require further interest rate steps. Overall, however, the head of the central bank was optimistic about the economy. Despite the weakness in the industrial sector, economic data have recently developed in a positive direction. In particular, he cited the easing of the trade conflict between China and the USA and the probability that Brexit could be avoided without an agreement.

Following the announcement of a pause in the cycle of interest rate cuts, the Fed is unlikely to ease interest rate restraints in December. Overall, however, we believe that the probability of a further rate cut in the coming months is high. In our view, this should be done in the first half of next year, as the economic momentum will then probably slow down.

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