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The Fed’s Decision and What It May Mean for Investors

Wells Fargo Investment Institute – October 30, 2019

The Federal Open Market Committee (FOMC) lowered its target range for the federal funds rate by 0.25% to 1.50%-1.75%. This is the third consecutive meeting at which the Federal Reserve (Fed) has lowered the fed funds rate by 0.25%. In its press release, the Fed removed language stating that it would “act as appropriate to sustain the economic expansion.” This could open the door for a potential pause in its rate-cutting policy for the remainder of the year.

Download the Key Takeaways (PDF)

Stated Reasons

  • Labor market activity remains strong, and economic activity is rising at a moderate rate.
  • Job gains have been solid, while the unemployment rate has remained low.
  • Indicators suggest that household spending has been rising at a strong pace, while business fixed investment and exports remain weak.
  • Implications of global developments for the economic outlook and muted inflation pressures support lower interest rates.

Looking Forward

  • 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 of the federal funds rate.
  • The FOMC noted that inflation is near its symmetric 2% objective.
  • Timing of future federal funds rate changes will reflect labor market conditions; indicators of inflation pressures and expectations; and financial and international developments.

What Else?

  • The Fed reduced its Interest On Excess Reserves (IOER) to 1.55%. The Fed will continue to purchase Treasury bills at least into the second quarter of 2020 to maintain ample reserve balances. It also will conduct term and overnight purchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures. 
  • We favor a more balanced approach to the yield curve and duration (a measure of interest-rate risk). We are neutral on duration and believe that investors should position duration near that of their individually-selected benchmarks. We continue to favor the short end of the yield curve, given its flatness.
  • We expect no more rate cuts this year and one additional FOMC rate cut in the first half of 2020.
  • The bond and stock markets were little changed following the announcement. Both Eric Rosengren and Esther George voted against the action of lowering interest rates.