The Federal Reserve on Wednesday approved a widely expected 25 basis point rate cut, while also signaling that the easing cycle may be nearing a pause.
In a vote that was broadly anticipated by financial markets, the Federal Open Market Committee lowered its benchmark funds rate by 25 basis points to a range of 1.5% to 1.75%.
This is the third rate cut this year by Fed Chairman Jerome Powell, who has described the moves as a "mid-cycle adjustment" to a mature economic expansion.
At the same time, language regarding future easing pointed to a higher bar.
The FOMC removed a key phrase from its post-meeting statement that had appeared since June, which said the committee was committed to "act as appropriate to sustain the expansion." Powell had used that phrase in early June to set the stage for the July rate cut, and it had been included in official language ever since.
In its place came more tempered wording.
The statement said the committee "will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate." Market participants had been watching for any signal that the Fed might begin to wind down the policy easing that followed nine rate hikes since December 2015. The new wording suggests the Fed is placing greater emphasis on data dependence rather than signaling a predetermined path of further cuts. According to data from the Chicago Mercantile Exchange (CME) ahead of Wednesday's decision, while market pricing implied roughly a 100% probability of a cut at this meeting, traders saw only about a 25% chance of a move in December.
In public remarks, Powell and several other Fed officials have described the U.S. economy as strong, driven by solid consumer spending, but threatened by a range of external factors: global weakness, U.S. economic softness, and uncertainties tied to geopolitical factors such as Brexit.
The statement continued to describe the labor market as "strong" and economic activity as rising at a "moderate rate." Nearly all other baseline descriptions of activity were unchanged, although the committee made one small adjustment regarding business fixed investment and exports, noting that they "remain weak."
The decision came on the same day the U.S. government reported GDP growth of 1.9% — a slowdown, but still above the 1.6% that Wall Street had expected. Meanwhile, job growth has slowed in recent months but remains well above the roughly 109,000 pace that the Atlanta Fed estimates is necessary to keep the unemployment rate at its 50-year low of 3.5%.
In addition to strong employment and consumer spending, stock market averages are also near record highs.
There is disagreement within the Fed over whether further rate cuts are needed. Esther George of Kansas City and Eric Rosengren of Boston again voted against the cut, with both maintaining that the committee should have held rates steady.
Meanwhile, President Donald Trump has been pushing the Fed to continue cutting rates and to resume the quantitative easing program it used to stimulate the economy during and after the financial crisis.
The Fed is buying bonds again, but officials insist this is not a return to quantitative easing, but rather a measure to keep the federal funds rate stable within its target range. Nevertheless, the central bank's balance sheet has expanded by about $100 billion over the past month and has again crossed the $4 trillion threshold, of which $3.6 trillion is in U.S. Treasuries and mortgage-backed securities. The expansion has been driven mainly by growth in Treasury holdings.
Wednesday's statement reflected this recent balance-sheet expansion, noting that open market operations would continue at least through the second quarter of 2020, while term and repurchase operations designed to stabilize overnight markets would continue at least through January of next year.