Fed Lowers Rate, But What is Going on in the Overnight Funding Market?

The Federal Reserve lowered the Federal Funds rate today by 25 basis points (bps) to 1.75% - 2.00%, a move that was widely expected and fully priced in the market. There was division within the voting members, with Esther George and Eric Rosengren preferring to keep rates steady while James Bullard voted for a 50 bp cut. Seven officials are expecting only one more rate cut this year, which is slightly less dovish than what had been expected.

Where the Fed goes from here is up for debate. Data points on the U.S. economy seem to be firming of late. The consumer remains quite healthy and manufacturing, the sector most impacted by trade, appears to have stabilized. However, many of the same issues continue to cloud the outlook for inflation and economic growth, and the Fed will continue to assess these risks and “act as appropriate to sustain the expansion.” We expect the Fed to cut at most once more this year, likely in December, as it attempts to normalize the shape of the yield curve and respond to slowing global growth and economic uncertainties. We view these as “insurance cuts” rather than the start of a prolonged easing cycle.

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