Global Daily – Weaker data will push the Fed to cut again

by: Bill Diviney

Fed View: Current policy ‘appropriate’ if economy stays on track – but will it? In prepared remarks to Congress, Chair Powell broadly reiterated his sanguine assessment of the US economic outlook from the post-FOMC press conference at the end of October, and continued to signal a relatively high bar for further rate cuts. While acknowledging the weakness in manufacturing and investment, he pointed to consumption continuing to “rise solidly,” and “favorable levels of consumer confidence.” Notably, he did not repeat his assessment from October that risks to the outlook had “moved in a more positive direction,” perhaps reflecting the continued uncertainty over whether a ‘phase 1’ trade deal with China will actually be done. Instead, he said “sluggish growth abroad and trade developments have weighed on the economy and pose ongoing risks,” and also pointed to ‘muted’ inflation with longer-term expectations “at the lower end of their historical ranges.”

On the outlook for policy, Powell said the current stance is “likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective.” Our view is that, regardless of any trade deal with China, weaker jobs growth will weigh more heavily on consumption than is in the Fed’s baseline scenario – 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. While a December cut does not look likely, we expect the Fed to ease policy again in Q1 2020. (Bill Diviney)