The FOMC reduced the fed funds rate by 25 bps to 4.00%-4.25% today, the first adjustment in nine months. Newly confirmed Trump ally Governor Stephan Miran was the lone dissenter at the meeting, preferring to cut by a larger 50 bps.
The decision reflected a “shift in the balance of risks” with the Committee believing that the “downside risks to employment have increased.” While inflation has ticked up since the spring, a development acknowledged in the post-meeting statement, Fed Chair Powell considers that policy still remains somewhat restrictive. Job growth has downshifted sharply and the unemployment rate has risen.
The odds of a scenario where the Fed cuts rates into economic expansion are rising. Jobless recoveries are not uncommon and by pumping more liquidity into the system when economic growth is accelerating can fuel a return of inflation. Investors should be on alert.