MNI FOMC REVIEW: Fed Makes 'Mid-Cycle Adjustment' to Rates

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve on Wednesday cut interest rates for

the first time since the financial crisis and signaled additional adjustments

may be in store to keep U.S. growth on track amid muted inflation pressures,

trade tensions and a global slowdown. 

     But Jay Powell's uneven defense of the committee's decision elicited swings

in market pricing, with the S&P 500 down sharply at one point and rate cut odds

for the rest of the year trading in a broad range as traders struggled to parse

the Fed chair's message. 

     He characterized the move to lower the fed funds rate target to 2.00% to

2.25% as a "mid-cycle adjustment," adding it is intended to "insure against

downside risks from weak global growth and trade policy uncertainty, to help

offset the effects these factors are having on the economy, and to promote a

faster return of inflation to our 2% objective." 

     Asked if Wednesday's cut marked the start of an easing cycle, as some

analysts expect, he said, "That is not our perspective now." 

     --SOME WORRIES EASED

     Small edits to the Fed's policy statement released Wednesday similarly

signaled that downside risks have receded somewhat since June. 

     Uncertainties to the outlook "remain" and the Federal Open Market Committee

will "continue to monitor" incoming information, the statement said. By

contrast, the FOMC said last month that uncertainties "have increased" and

pledged to "closely monitor" the situation as it developed. 

     Foreign growth, especially in manufacturing, has "disappointed," Powell

said, noting that major central banks are responding with accommodative policy.

But whereas trade tensions "nearly boiled over" in May and June, they "now

appear to have returned to a simmer," Powell said.  

     Going forward, the Fed intends to keep an eye on weak global growth, trade

and inflation, he said. "I would love to be more precise," but the Fed is also

"learning by doing" on how to respond to trade tensions, he said. 

     --INFLATION BELOW TARGET

     Two hawkish dissents from Fed presidents Esther George and Eric Rosengren

reflected likely broader disagreement among policymakers over whether

Wednesday's rate cut was appropriate in light of growth coming in "a little

better" than Fed had forecast and the economic performance "reasonably good," as

Powell said. 

     But Powell defended the rate cut as designed to "keep the outlook

favorable" and flagged inflation worries. The committee is mindful that

"inflation's return to 2% may be further delayed and that continued below target

inflation could lead to a worrisome and difficult to reverse downward slide in

longer term expectations," he said.  

     The personal consumption expenditures price index, the Fed's preferred

inflation gauge, rose 1.4% over the past year, while PCE inflation excluding

food and energy rose 1.6%, short of goal. Wages are rising but "not at a pace

that would put much upward pressure on inflation," Powell added. 

     He declined to link Wednesday's rate decision to a broader re-think on its

inflation strategy, in response to a question from MNI, but said the FOMC is

seriously examining ways to improve its policy framework. Targeting 2% on

average over a longer period of time is one option officials have been

considering. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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