The Fed’s commentary after the rate announcement could be as important as the rate decision itself. In his post-meeting press conference, Fed Chair Jerome Powell will have to deliver another delicate message to investors, who could interpret good news as bad news. Lately, Powell and other Fed speakers have hinted at the need to loosen policy, but they have leaned on largely positive commentary about the U.S. economy. Just last month, Powell said the U.S. economy is performing “reasonably well” with solid economic fundamentals. That could be a difficult dynamic to reconcile with looser policy. We suspect Powell and the Fed won’t shy away from optimistic observations about the U.S. economy, but they will likely need to elaborate extensively on why a rate cut is happening right now. As always, markets will likely hang on Powell’s every word, and missteps could trigger volatility. Reducing the policy rate while maintaining sales of balance sheet assets could be another communication challenge. A July cut would run counter to the Fed’s intentions with balance sheet sales, which are scheduled to end in October.
There’s a chance the Fed may end runoff sooner than expected to sync up its balance sheet and rate policy, and to help convey a unified push to loosen policy across the board.

Cutting rates now would help loosen financial conditions, although some of that impact has already been priced in. It’s too soon to tell exactly how a lower policy rate will help boost economic growth in this environment, but we hope it will at least provide a lift to sentiment, which could translate into higher consumer and corporate spending. A rate cut could also have implications for the future of monetary policy. The Fed doesn’t put a definitive timeline on future policy changes, as we’ve noticed from policymakers’ rhetoric over the past several years. Guaranteed policy changes would defy the Fed’s promises of flexibility and data dependency.
One tool we use to understand Fed members’ expectations is the “dot plot,” a summary of policymakers’ fed funds rate projections. As of June, the dot plot shows 8 of 17 Fed members expect at least one rate cut by the end of 2019 and even lower rates by the end of 2020.Unfortunately, we won’t get an updated dot plot or economic projections at this meeting (unless the Fed unexpectedly releases updates), as the next updates are scheduled for September. History shows that a Fed cut has led to a more long-term shift in policy strategy. Since 1990, the Fed has cut rates an average of five times in the 12 months after the first course correction in an expansion. After the July 1995 cut, the Fed reduced the policy rate two more times over the next 12 months (and five times before the end of 1998) before implementing another series of rate hikes. We agree with the consensus (and Fed members) that more cuts are likely ahead, especially with no U.S.-China trade deal in sight.