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Divided Federal Open Market Committee cuts target rate

United States federal reserve signature on American paper money.

Predictions turned out to be true when the U.S. Federal Reserve cut interest rates by 0.25% and set the new target rate at 1.75% to 2.00%. This is the second consecutive cut made by the Fed but this time the Committee's decision, both on the rate cut itself as well as future decisions, was split across voting members.

The thinking behind the rate cut is that it will sustain further economic activity and help the Fed achieve its maximum employment and 2.00% inflation objectives.

Split between the need for further easing

Global concerns remain the primary motivator behind the rate cut but the Fed was split over the need for further easing to maintain economic stimulus. One member (out of 12) wanted to lower rates by an additional 0.25% and two voted to keep rates unchanged. Looking forward, the Fed's dot plot shows no more rate cuts in 2019 despite seven members thinking one more cut is needed. We'll continue to monitor future announcements.

Global uncertainty versus a still-strong U.S. economy

While there is uncertainty about global growth, Brexit and the ongoing trade war between the U.S. and China; information received since the Federal Open Market Committee last met in July shows that the U.S. labour market continues to remain strong, unemployment remains low, jobs gains continue and household spending continues to rise at a strong pace. However, business fixed investment and exports have weakened on a 12-month basis.

The committee's expectations for real GDP increased slightly in 2019 from 2.1% to 2.2% as did expectations for unemployment, rising to 3.7% from 3.6%. No changes for 2020. There were also no changes to inflation expectations.

Status quo for the Fed

The Fed will continue to monitor incoming global economic information and make future rate decisions that will support its ongoing objectives. The Committee plans to assess realized and expected economic conditions relative to its goals for the labour market and inflation.

Mixed bag of market reactions

Following the release of the Fed statement, the S&P 500 was down, 10-year treasury bonds rose, the U.S. dollar rose, oil (West Texas Intermediate) was flat and gold was down.

Given that this decision was widely expected (and is in-line with our expectations), we remain well positioned for the current market environment. As always, we will continue to monitor the situation closely for any new opportunities or risk as they arise. If you have any questions about the rate cut or how it may affect your portfolio, contact 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, CFA, MBA, was an Assistant Vice President with the Multi-Asset Management team. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.

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