In our view, the Fed is taking the approach of what we would call constructive ambiguity — giving itself a reasonable amount of flexibility given the balance of risks around the economy and the erratic policy landscape out of the White House.
The Federal Reserve reduced its targeted federal funds rate by a quarter point to a range between 1.5 and 1.75 percent at its October meeting Wednesday. In its policy statement, the committee removed the phrase “act as appropriate,” possibly opening the door to taking a wait-and-see approach to additional rate cuts. The change to the policy statement notes the central bank will monitor incoming information as it “assesses the appropriate path” of rates.
In our view, the Fed is taking the approach of what we would call constructive ambiguity — giving itself a reasonable amount of flexibility given the balance of risks around the economy and the erratic policy landscape out of the White House.
While the Fed may ultimately choose to hold off on another rate cut to ascertain the direction of the economy under pervasive uncertainty, at the end of the day the Fed is the last adult in the room and needs to preserve some ambiguity, especially should the trade conflict intensify.
Since the last rate hike at the end of 2018, the real (inflation-adjusted) yield curve has inverted out to 30 years’ maturity — a testament to the impact of the trade war on current and potential economic growth. The Fed’s policy pivot — ending its program of interest-rate normalization — continues to push down on the front end of the yield curve, providing an climate of accommodation for investment and reinforcing the perception that it will take appropriate action when necessary.
