The Federal Open Markets Committee, the policy-making arm of the Federal Reserve, just announced its latest monetary policy decision. As expected, the committee cut interest rates for the first time in more than a decade but not by as much as some were hoping.
With that in mind, here's a rundown of the FOMC's decision, the other major development to come out of the July meeting, and what the expectation is going forward.
The Federal Reserve's interest rate decision
Immediately before the FOMC announced its decision, the market had been pricing in a 79% chance of a 25-basis-point rate cut, a 21% chance of a 50-basis-point cut, and absolutely no chance that the FOMC would hold the federal funds rate steady.
Well, the market got exactly what it was looking for. The FOMC decided to cut the federal funds rate target range by 25 basis points to 2.00% from 2.25%. This is the Fed's first rate cut in more than a decade.
Interestingly, the rate cut passed by a vote of 8 to 2, with the two dissenters preferring to leave rates unchanged.
In addition, the FOMC decided to end its balance sheet reduction two months earlier than expected. Instead of concluding at the end of September, the Fed will cease its balance reduction right away.
Did the Fed's language change?
As expected, the FOMC's closely watched statement didn't have many major language changes aside from those directly related to the rate cut and the earlier-than-expected end of the balance sheet reduction.
Specifically, the FOMC said that "In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate..."
The statement still says that the economic expansion is likely to continue, that the labor market remains strong, and that economic activity is rising at a "moderate" rate. And perhaps most significantly, the statement says that the FOMC will continue to "act as appropriate" to sustain the expansion.
No dot plot or new projections this time
It's worth pointing out that the only information to come out of this meeting was the FOMC's interest rate decision and statement. The closely watched dot plot and the FOMC members' economic projections are only released four times per year, and their next release won't be until the conclusion of the FOMC's September meeting.
Why did the stock market drop after the Fed's announcement?
Immediately after the FOMC's decision was announced, the stock market dipped slightly. This shouldn't be too big a surprise. Think of it this way -- the two most likely outcomes were a 25-basis-point cut and a 50-basis-point cut. We got the less dovish of the two, so there are likely more disappointed investors than there are investors who found the decision to be a pleasant surprise.
Looking forward to the FOMC's next meeting (September), the market now expects another 25-basis-point rate cut, with a small chance that rates will remain where they are, according to CME Group's FedWatch Tool. Of course, this could change between now and then if economic data comes in significantly better or worse than expected.