In a Nutshell:  “… uncertainties about this outlook have increased.”

Decision: Fed funds rate target range remains at 2.25% to 2.50%.

The Fed kept interest rates steady today, but signaled a rate cut could be coming. 

The view of economic conditions was largely unchanged from the last meeting, when the FOMC indicated it would remain “patient” when it came to determining the direction of policy.  While investment was viewed as “soft”, consumption “picked up”.  That is largely a wash.  Labor market conditions were still considered to be “strong”.   And, the forecast for 2020 ticked up a little, form 1.9% to 2.0%.  So, it can be said that if the Fed was signaling weakness, it had little to do with the economy.

What did change was the categorization of inflation.  The statement noted that “Market-based measures of inflation compensation have declined…” It also stated, in the context of its views on both growth and inflation, that “uncertainties about (the) outlook have increased.”  Therefore, the Fed, instead of being patient, will “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion…” 

Despite the lack of data pointing to a weak economy, of the seventeen board and bank presidents who provided forecasts, eight expect the funds rate to be cut this year and seven think it will be reduced twice.  On the other hand, eight think that rates will not change this year.  In addition, while only one member thought there would be rate hike this year, three expect it to go up next year!  That is a pretty fractured Fed. 

My problem with the statement and the forecasts is that taken together, they are inconsistent.  Why signal that rates need to be cut when growth might actually be a little better than expected and in any event, is not showing signs of faltering?  And do those who want to ease really believe that a half point reduction in the funds rate will cause inflation to accelerate?  I am not sure what model would show that.

If inflation is the great concern, which it appears to be, then it is likely to take a lot more than 50 basis points to drive up inflation significantly.  It is not as if growth has been weak over the past year.  However, it doesn’t look as if the Fed is prepared to go that route. 

So why did the Fed signal a rate cut could be coming in the near term?  The only explanation I have is that the markets told them to say that.  A failure to remove the word patient from the statement could have been greeted quite negatively by investors.  So the Fed gave the markets what they wanted – for now. 

Ultimately, though, the data will prevail.  If the economy is as decent as I think it is, it will be hard for the Fed to cut rates without further declines in inflation, even if a growing number of members are no longer patient.  (The next FOMC meeting is July 30-31, 2019.)