U.S. Federal Reserve lowers rates again to support ongoing growth

October 31, 2019 Edward Golding

As most predicted, the U.S. Federal Reserve (Fed) cut rates a third consecutive time to lower its target interest rate range to 1.50%-1.75%. This cut was made to protect the current historic run of U.S. expansion from trade threats, weak global growth and what was described as "muted inflation pressures." The Fed reasons that the cut will support the Federal Open Market Committee's (FOMC) objectives of sustained economic expansion, a strong labour market and inflation near its symmetric 2.0% objective.

A slight change in tone

This time around, the Fed changed its statement from last month. Instead of saying that it would “act as appropriate to sustain the expansion"; it instead said it will monitor incoming information as it “assesses the appropriate path" for rates.

Dissent among the Committee

What did remain the same was the split in the room between voting members who wanted to keep the rate the same versus those who wanted another cut. Kansas City Fed President Esther George and Boston Fed President Eric Rosengren dissented for a third straight time, preferring to hold steady at this meeting. Interestingly, St. Louis Fed President James Bullard voted with FOMC majority, after dissenting at the prior meeting, in favour of a half-point cut.

Committee continues to monitor the usual suspects

Uncertainties remain, especially around global developments. When it comes to assessing the appropriate path of rates, the Fed will consider the usual indicators. As expected, the labour market remains strong and unemployment continues to be historically low. Household spending continues to rise while business fixed investment and exports remain weak. Inflation remains in check with overall inflation and inflation for items other than food and energy running below 2%.

The door remains open to further easing, as uncertainties remain around the Fed's outlook even as it calls the labor market and consumption “strong"; acknowledges that business investment and exports “remain weak."

What does the rate cut mean for investors?

Following the Fed's statement and Chairman Powell's remarks, the S&P 500 Index closed up 0.33%. The U.S. dollar and U.S. government 10-year treasury yields were down.

To summarize, the Fed's decision and motivation are all within our expectations and we are not considering any significant adjustments to our strategy at this time. With central banks around the globe continuing to make monetary policy more accommodative and economic conditions improving, we remain in favor of equities relative to fixed income and are positioned to take advantage of a steepening yield curve as improving economic growth gets priced into longer term U.S. treasuries.

As always, if you have any questions about the Fed announcement, interest rates in general (the Bank of Canada decided hold rates steady earlier this week) or how they impact your portfolio, please don't hesitate to reach out to your MD Advisor*.

*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

About the Author

Edward Golding

Edward Golding, CFA, MBA, is an Assistant Vice President with the Investment Management and Strategy team at MD Financial Management. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.

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