U.S. FOMC Statement

 Fed cut interest rates by 25 bps, in line with expectations

• As widely expected, the Federal Open Market Committee (FOMC) opted to reduce the target range for the federal funds rate to 2-2.25%. The decision was not unanimous, with two committee members preferring for rates to remain unchanged: Esther George and Eric Rosengren.
• As in the June statement, today's release characterized the labor market as strong and business investment as soft. The Committee also saw core inflation running below the 2 percent target.
• With regards to the decision to cut, the FOMC pointed to global developments as well as muted inflation pressures as the main reasons for lowering interest rates. It also left the door open for further easing by leaving in "act as appropriate to sustain the expansion" in the statement.
• Importantly, the Committee decided to end the balance sheet drawdown two months earlier than previously indicated.

Key Implications

• The rate cut today comes as no surprise, however a less anticipated decision was to end the balance sheet drawdown two months earlier than previously stated. By itself, this would be interpreted as a dovish-tilt, but the fact that there were two dissenters on the decision and that the Fed was mainly focused on external forces as the driving force to the insurance step suggests we are not at the forefront of a more aggressive rate cut cycle.
• The Fed left the door open for further monetary stimulus and we believe this will come in the form of one more "insurance" cut in September. A more dovish stance would likely require stronger evidence of deterioration in domestic conditions. The data so far have shown a resilient US economy and there's not yet enough evidence to suggest the softness in global growth is significantly undermining the domestic expansion outside of the manufacturing base.

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