Christian Scherrmann (DWS) | As has been widely anticipated, the Fed is again lowering key rates by 25 basis points – the third step in the current cycle. Judging from the obligatory statement, it seems quite plausible the Fed might be done with cutting for a while. From now on, its main focus seems to be on monitoring the U.S. economy, rather than, say, on pondering whether the current interest rate level appears appropriate, given the current situation. In short, the Fed is once again data-dependent.
In his press statement Powell became even clearer. He described current monetary policy as appropriate – provided that and for as long as there is no further deterioration. If, however, the economy were to slow further, then of course the Fed would be ready to reorient its policies.
Powell thus elegantly tells markets not to get ahead of themselves in their rate cutting hopes. No further interest rate cuts should be expected in the short term. However, he is not closing the door for adjustments altogether either. It is a familiar pattern, and not just in the recent past. Historically, Powell pointed out that the same insurance strategy was used by none other than Alan Greenspan in the mid-1990s. Back then, similar Fed cuts succeeded in extending the US growth cycle by several years, albeit at the prize of further inflating the dotcom bubble. We do not expect similar consequences right now, but we are fairly confident that there will be no further need for rate adjustments in the next few months.