The FOMC has dropped the target range for its overnight lending rate to 2.00%– 2.25%, or 25bps. The Fed cited "implications of global developments for the economic outlook as well as muted inflation pressures" in its first rate cut since December 2008.

We feel there is a range of things that it is looking at. The low inflation allows the Fed some latitude to take pre-emptive steps and hopefully avoid moving into the future to something like negative rates.

Because the Fed cut only 25bps, it avoided doing what some would have felt was more “shock and awe” with 50bps. So, it can move towards a language like “data dependent” now that it has shown that it is prepared to be flexible. Hence, the Fed has left the door open to future cuts.

• The US Fed, as expected, lowered its benchmark rate by 25bps to 2.00%–2.25%. It came amid President Trump’s intense political pressure and persistent market expectations. The decision was reached with 2 votes favouring no rate cut.

• The decision is seen as an insurance policy not against what is wrong with the economy now, but what could go wrong in the future. It was the first rate cut by the central bank in more than a decade.

• The FOMC cited "implications of global developments for the economic outlook as well as muted inflation pressures". The committee called the current state of growth "moderate" and the labour market "strong", but decided to loosen the policy anyway.

• The Fed cut was simply a "midcycle adjustment" and that the committee did not see the type of marked economic weakness that would necessitate a longer rate-cutting cycle.

• We feel that there is a range of things that it is looking at. The low inflation allows the Fed some latitude to take preemptive steps and hopefully avoid moving into the future to something like negative rates.

• Because the Fed cut only 25bps, it avoided doing what some would have felt was more “shock and awe” with 50bps. So, it can move towards a language like “data dependent” now that it has shown that it is prepared to be flexible. Hence, the Fed has left the door open to future cuts.

Source: AmInvest Research - 1 Aug 2019