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Third rate cut a charm? Fed shifts to steady-rate bias

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The U.S. Federal Reserve (Fed) reduced its target policy rate (“fed funds rate”) range by 0.25 percent today following its scheduled two-day meeting. Economist surveys and interest rate market prices anticipated the change. Both Fed Chairman Jerome Powell’s press conference and the official statement implied (and we expect) the Fed will hold rates steady in December while retaining the option to cut rates further if conditions deteriorate. Their preference is likely to await confirmation that this and two earlier interest rate cuts starting in July are enough to halt slowing economic trends. Market expectations for future cuts have fallen and imply another 0.25 percent cut by the end of 2020 as opposed to recent expectations for multiple cuts. This structure equates to high odds of no further cuts and low odds of multiple additional cuts in the event of further economic weakness. Stocks gained slightly on Chairman Powell’s comment that inflation would need to rise significantly before the Fed considers raising rates to address inflation concerns. Short-term bond yields, which move inversely with prices, fell slightly.

Investors focused on the formal statement and Chairman Powell’s press conference as the Fed provided no updates to economic projections, and bond markets had already priced in today’s cut. Both the statement and press conference implied holding rates steady is the likeliest path forward for now. Powell stated, “We see the current stance of monetary policy as likely to remain appropriate.” The official statement replaced the phrase “the committee…will act as appropriate to sustain the expansion” with the more benign phrase, “the committee…will assess the appropriate path of…rate[s].” Two members voted against the rate cut, reminding investors the Fed remains divided on the appropriate balance between insurance against future uncertainty versus monitoring trailing data. Market expectations now more closely align with Fed signals, removing a potential catalyst for market volatility in coming weeks.

Several factors have contributed to a disruption in short-term borrowing rates between institutions beginning in September. The Fed initially responded with overnight and two-week loan programs, then began buying Treasury bills to inject cash into markets in October. Chairman Powell has continued to downplay the Fed’s Treasury bill purchases as a technical change rather than monetary stimulus. We reaffirm our belief that the liquidity shortage does not foretell more substantive issues.

We remain focused on the trend in domestic and international economic data. We track hundreds of economic data points across the globe via our proprietary “Health Check” monitor, which indicates the global economy is on a path of a re-synchronized slowdown. The rest of the world is slowing and the U.S. economy, which had been outperforming, has consolidated with the rest of the world. However, odds of a recession, while rising, remain modest globally and subdued for the United States. We also see signs that momentum could be bottoming, indicating the worst of the slowdown may be over. Central banks outside the U.S. are beginning to slow their pace of interest rate cuts after slashing rates at the fastest pace since the financial crisis during the third quarter.

We maintain our balanced assessment of risks between stocks and bonds, which is guiding our recommendation to hold stock and bond allocations close to long-term strategic target allocations. This reflects higher levels of volatility across global equity markets and lower bond yields in the United States relative to year-ago levels. We recommend high-quality bonds comprise the majority of bond portfolios to provide adequate portfolio diversification against riskier holdings.

As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.


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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

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Important Disclosures

Investment products and services are: 
NOT A DEPOSIT  •  NOT FDIC INSURED  •  MAY LOSE VALUE    NOT BANK GUARANTEED   NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

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