As expected, the US Federal Reserve cut interest rates again yesterday. In total, the US Federal Reserve has cut 75bps this year, almost completely reversing the hikes of 2018; the target range for US Fed Funds now stands at 1.5-1.75%. The committee remains split, with two members still dissenting against rate cuts, but the committee’s top dove Bullard did not argue for a bigger rate cut, unlike previous meetings.

As for what is next, the statement and Chairman Powell’s press conference offer few clues. According to the Fed the economy remains sound, but there are concerns over exports and business investment, the depressing effect of trade discussions, and “global developments”. This justifies the cut, but any future cuts are not being signalled – hence the reporting of this current move as a ‘hawkish cut’. In his press conference, Powell emphasised that their stance was “likely to remain appropriate” for some time. As we’ve already seen this year, less forward guidance may well lead to greater volatility as markets struggle to predict the Fed’s next move. A line saying the Fed will “act as appropriate to sustain the expansion”, seen in multiple prior rate announcements, was noticeable by its absence in the statement. A return to rate hikes, though, is not on anyone’s radar: Powell said only a “really significant” rise in inflation would cause a re-evaluation.

In theory we should regard every rate cut as being the last one, otherwise the central bank should have announced a bigger cut. In practice, most economists expect further weakness in the economy and hence further rate reductions into 2020. For financial markets in the near term though, the move is positive. Cutting the risk free rate will encourage investors to move out of cash and into other assets – the S&P 500 closed at a record high on the day of the announcement.

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