Fed Decision: Interest Rates Cut for the First Time Since 2008

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In a widely expected decision, the Federal Reserve's (Fed) Federal Open Market Committee (FOMC) cut the Fed Funds rate by 25 bps recently and moved short term rates to a range of 2.0 to 2.25%. Markets had expected a rate cut following comments from FOMC Governors and Chairman Powell as longer-term Treasury rates declined.

The FOMC's decision to trim rates can be seen as an "insurance cut," or one done during relatively strong economic conditions to sustain the economic cycle against a backdrop of softening growth, subdued inflation, and heightened global uncertainty regarding trade and tariffs. Notably, this is the first cut of any kind since the Great Financial Crisis spurred the Fed to drive rates from 5.5% to 0%.

The impact of the more recent rate hikes and quantitative tightening may have been underestimated by investors and likely played a significant part in slowing domestic growth. The impact of tightening often takes between 12 and 18 months to become apparent and may be a significant factor in the current slowdown. As a result, the Fed now realizes it needs to reverse the impact of rate hikes to remove one potential cause of slowing growth.

Future markets expect three cuts between now and year-end to move the Fed Funds rate from 2.5% to 1.75%. However, it is important to remember that this FOMC is heavily data-dependent and strong data releases between now and 2020 may lead to fewer cuts than expected by optimistic markets.

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