· Rate Outlook: The FOMC left the Federal Funds rate target range unchanged between 2.25% and 2.50%, but indicated readiness to cut rates for the first time in over a decade to sustain the current economic expansion. Only St. Louis President James Bullard voted for a 25 basis point rate cut, which would mark the first dissent during the Powell era. The outlook for rates is undoubtedly lower, with 7 FOMC members projecting two 25 basis point rate cuts in 2019, and 1 committee member projecting just 1.
· Key Changes to the Statement: The statement dropped the reference to being ‘patient’ in adjusting monetary policy, and instead said the committee will “closely monitor implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective”. Additionally, the statement indicated that economic activity is rising at a moderate rate, from March’s assessment of a solid rate. The Fed acknowledged inflation continues to fall short of the 2% target, changing the statement language from inflation has (temporarily) declined to inflation is running below 2%.
· Key Changes to the Economic Outlook: The first updated economic projections since the March meeting showed the median estimate for 2019 GDP growth unchanged at 2.1%, while 2020 was revised higher by .1% to 2.0%. Consistent with the change in the statement language, officials chopped projections for core inflation from 1.8% in March, down to 1.5%. Projections show the Fed anticipates a consistent undershoot of inflation over the medium term, with revised estimates of inflation at just 1.9% through 2020. The median estimate for the unemployment rate was lowered by 0.1% for all forecasted years, with officials seeing the unemployment rate at 3.6% this year, rising to 3.7% next year and 3.8% in 2021. The unemployment rate officials consider consistent with an economy at full employment in the long run was revised lower to 4.2%, from 4.3% in March.
· Our Quick Thoughts: Given the consistent undershooting of inflation and growing global uncertainties, the Fed will cut rates by 50 basis points by their September 18th meeting, in our view. The market is now pricing in 100% chance of a rate cut at the July 31st meeting and over an 80% chance of two cuts by September.