What the Federal Reserve's rate cut decision means

Cornelia Mascio
Giugno 20, 2019

US stocks closed higher with the Nasdaq up the most (0.4 per cent) on the US Federal Reserve hinting that a rate cut could be close.

Business investment is slowing, uncertainty has increased, and the US economy is growing at a "moderate" pace, the Fed said Wednesday, a notable downgrade from last month when the central bank characterized the economy as "solid".

The Federal Reserve held rates steady but raised the prospect for two potential rates cuts this year, as policy makers continue to weigh the right time to act amid concerns over President Donald Trump's trade policies.

The policy-setting Federal Open Market Committee kept the key rate in the 2.25%-2.5% range but said "uncertainties about this outlook have increased" and the Fed "will act as appropriate to sustain the expansion".

"You'll notice that the statement was not all that downbeat on growth but did highlight weak inflation and uncertainties about the outlook", wrote Neil Dutta, head of US economics at Renaissance Macro Research, LLC, in a note to clients shortly after the June statement was released.

After this line came an explicit acknowledgement of soft inflation, as Dutta pointed out: "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". One Fed leader voted to cut rates at this meeting but was overruled.

Almost half of the members of the Fed's rate-setting body see a rate cut this year, the bank indicated. Earlier this month, he said the Fed is open to lowering interest rates to counter any damage from the U.S.' trade war with China. Expectations of lower rates has helped buoy Wall Street in May with the top three indices, The S&P 500, Dow and Nasdaq are all up more than 6 per cent in June.

But the projections did not reflect much change in the outlook for the economy: the median estimates for growth and unemployment were essentially unchanged compared to March, while the forecast for inflation was cut to 1.5% from 1.8% previously.

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