As expected, the Federal Reserve (Fed) cut the federal funds rate band by 25 basis points from 1.75%–2.00% to 1.50%–1.75%.1 Changes in the text of the Federal Open Market Committee statement, as well as information provided in the press conference, indicate that the Fed believes it is done cutting interest rates unless economic conditions continue to soften. It has now cut interest rates three times this year, making this mini cutting cycle consistent with the shorter cutting cycles of 1996 and 1998. Fed Chairman Jerome Powell indicated that the threshold for the Fed to hike interest rates in the future is quite high.
Invesco Fixed Income believes the near-term path of the federal funds rate is likely to be dictated by the performance of economic data and progress on US-China trade talks. We believe the pace of economic growth in the US will continue to slow over the next several months, but it is not clear whether activity will slow quickly enough for the Fed to resume cutting. The Fed has not indicated how much economic activity will need to decline for it to begin easing again.
The bond market, which had been pricing in a 25% chance of a cut in December, reduced the odds of another cut in 2019 to nearly zero.2 However, it increased the odds of additional cuts in 2020.2 Risky markets such as equities performed well.3 The dollar softened against other currencies. We believe that longer-dated interest rates will begin to rise as the market prices in stronger global growth in the first half of 2020. We expect the dollar to continue to depreciate.
1 Source: Federal Reserve Bank, Oct. 31, 2019
2 Source: Bloomberg L.P., Oct. 31, 2019
3 Source: Bloomberg L.P., S&P 500 Index, Oct. 31, 2019
Blog header image: Hamid Ahang / EyeEm / Getty Images
A basis point is one hundredth of a percentage point.
The federal funds rate is the rate at which banks lend balances to each other overnight.
The Federal Open Market Committee (FOMC) is a 12-member committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The opinions referenced above are those of the author as of Oct. 31, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.