Fed View: Door to cuts left slightly ajar – The FOMC went further than we expected in signalling it is done with the current round of rate cuts, by switching to more neutral language on the future path of the fed funds rate. In particular, the key phrase from the FOMC statement that the Fed would “act as appropriate to sustain the expansion” was replaced by the more neutral “will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.” With that said, the Committee did not go as far as to revert back to being ‘patient’, as it was earlier in the year, and it also retained the qualifier to its sanguine economic outlook that “uncertaintainties […] remain.” The reference to ‘uncertainties’ first appeared in the June statement that preceded the July rate cut, and suggests the Fed is by no means taking further cuts off the table.
We push back our rate cut forecast to Q1 – Nonetheless, the Fed’s reaction function has clearly shifted, and it looks as though the hurdle to more cuts is higher than it was before. However, we think the Committee’s outlook might be a little too optimistic. In the press conference, Chair Powell referred to the risks in the outlook as having ‘perhaps moved in a more positive direction’. When pressed on this, he referred to progress towards a possible trade deal with China. We think some kind of truce that freezes existing tariffs is possible, but even this modest step looks far from certain. Indeed, just today, the November APEC summit in Chile – where a deal might have been sealed – was cancelled, suggesting the US and China are still some distance from even an interim deal. Moreover, while there are some tentative signs of a bottom in manufacturing, global growth remains fragile, and we expect the passthrough from weak manufacturing to slower jobs growth and consumption to be more pronounced than the Fed appears to have built into its base case – our 2020 GDP growth forecast is 1.3%, well below the FOMC’s median 2.0% forecast (Q4/Q4 figures). As such, we think weaker data will ultimately force the Committee’s hand, though it looks as though it will take longer for the Fed to be convinced of the need for more accommodation. We therefore now expect one further 25bp cut in Q1 2020, later than our previous forecast of an additional December move. (Bill Diviney)