The Federal Reserve cut its benchmark interest rate for the third straight meeting and signaled it may pause to see whether these easing steps are enough to sustain the economic expansion.
At the policy meeting on Wednesday, officials said they would lower the federal-funds target rate by a quarter percentage point, to between 1.5%-1.75%.
In taking this action, the Fed cited “the implications of global developments for the economic outlook as well as muted inflation pressures.” In essence, these rate cuts are insurance against a recession.
Boston Fed President Eric Rosengren and Kansas City Fed President Esther George both dissented. They have voted against all three rate cuts and argued that easing was unnecessary until more signs of economic weakness were evident. Cutting rates now would give the Fed less ammunition to combat a downturn in the future and might foster financial imbalances, they warned.
The most important part of the Fed’s statement was what the central bankers didn’t say.
Policy makers removed language in place since the summer promising the Fed would “act as appropriate” to sustain the expansion. That had been a signal that policy easing was in train. The Fed had used that phrasing with each of its June, July and September statements.
Fed Chairman Jerome Powell has previously described the easing as a “mid-cycle adjustment” to guard against downside risks. Economists said the central bank did not want investors to think that rates were headed back to zero.
The Fed was upbeat about the outlook, saying the labor market “remains strong” and the economy has been growing at a moderate pace.
The government reported earlier Wednesday that third-quarter GDP growth rose at a better-than-expected 1.9% annual rate.
By taking away the “act as appropriate” language, the Fed is trying to guide the market not to expect more cuts for now. It is unclear whether this will cause a Wall Street blowback. Before the statement, the market had priced in a 30% chance of a rate cut in December, with stronger odds priced in for one cut by spring.
Shorter-dated Treasury yields
jumped off their interday lows following the Fed decision. Stocks were little changed. Both the Dow Jones Industrial Average
and the S&P 500 index
are close to record-high levels in light of the round of Fed easing.
Powell will hold a press conference at 2:30 p.m. Eastern.