By Michael S. Derby
NEW YORK (Reuters) – The central bank official responsible for implementing monetary policy at the New York Federal Reserve said on Tuesday financial markets were prepared to properly interpret a bigger-than-expected interest rate cut as something other than a sign of trouble.
While futures markets did not fully price in the half percentage point rate cut delivered by the Fed last week, market intelligence collected by the New York Fed indicated investors “were likely to interpret a 50-basis-point cut exactly for what it was – a recalibration of the FOMC (Federal Open Market Committee) policy toward a more neutral stance that will help maintain the strength of the economy and the labor market while continuing to enable further progress on inflation,” said Roberto Perli, manager of the Fed’s System Open Market Account, in a speech text.
Last week, the Fed, confronted with falling inflation pressures and rising risks to the job market, lowered its overnight target rate range by half a percentage point to between 4.75% and 5.5%, and penciled in 50 basis points’ worth of additional cuts into the end of the year.
Going into the Fed meeting, some had worried a larger-than-expected Fed rate cut might signal central bank worry about the outlook, rather than what it turned out to be: a move to withdraw unneeded policy restrictiveness from the economy.
The Fed also said last week it was pressing forward with plans to shrink its balance sheet.
Perli said in his speech “market intelligence had been indicating clearly for many months that market participants understood well that there is no mechanical link between interest-rate and balance-sheet decisions.”
