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United States Monetary Policy June 2019

United States: Fed stands pat in June but signals upcoming rate cuts as economic picture deteriorates

At its 18-19 June monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) voted to maintain its target range for the federal funds rate at 2.25%–2.50%. The decision was widely expected by market analysts, given that the Fed had signaled a patient approach to policy decisions in recent months.

The June rate decision, however, was not unanimous, with one governor voting to cut the federal funds rate by 0.25 percentage points. Following Fed Chair Powell’s declaration on 4 June that the Central Bank would “act as appropriate to sustain the expansion”, especially taking into account the trade war with China, the move further supported analysts’ suspicions that the Fed is considering cutting rates in the near-future.

The economic picture has deteriorated since the May meeting. Crucially, this meeting preceded the decision by President Trump to raise tariffs on Chinese products from 10% to 25% on 10 May, which sharply heightened bilateral tensions and unease in financial markets. Though the Fed still considers the labor market as strong, in its post-meeting communiqué it described economic activity as “moderate” instead of “solid”. The Bank also noted that, while consumer spending seems to have picked up from the weak Q1 reading, business investment appears to be “soft”. Moreover, inflation has remained doggedly under the Fed’s 2% target, while market measures of inflation expectations have also declined. Lastly, the Fed noted that uncertainties about the outlook have increased, in a thinly-veiled reference to the trade war. Against this backdrop, the statement reaffirmed Chair Powell’s 4 June comments, confirming the Fed would cut interest rates in the near-future if necessary.

Turning to the Summary of Economic Projections, the median forecasts for headline and core inflation this year were consequently downgraded from 1.8% to 1.5%, and from 2.0% to 1.8%, respectively; 2020 forecasts were also both revised down by 0.1 percentage points to 1.9% each. Unemployment rate projections for 2019, 2020 and 2021 were each revised down by 0.1 percentage points, while the median 2020 GDP forecast was bumped up 0.1 pp to 2.0%—likely reflecting the effects of probable rate cuts.

As for the interest rate projections, although the median forecast for this year remained at 2.25%–2.50%, a closer look at the Fed’s “dot plot” reveals a large shift compared to the March projections. In March, six FOMC members saw up to two more rate hikes this year, while none saw a rate cut. As of June, 7 out of 17 members thought the Fed would deliver two rate cuts, while only one member saw a rate hike as likely. Meanwhile, for 2020, the median forecast was 2.00%–2.25%, down from 2.50%–2.75% in March.

Lastly, turning to the outlook, a large number of our panelists now expect two rate cuts by year-end, although they disagree on the timing. One thing that is clear, however, is that the next G20 meeting between President Trump and Xi Jinping will be crucial. James Knightley, chief international economist at ING, is relatively optimistic, noting: “for now, we’re sticking to our recently revised forecast for rate cuts in September and December, but if the data deteriorates and President Trump and President Xi’s meeting next week goes badly, we’re open to moving that to July and September.” This position is shared by some of our other panelists, such as DBS.

On the other hand, economists at Goldman Sachs are more dovish and already “expect cuts in July and September, as well as an end to balance sheet runoff in July” while also signaling a rate cut of 50 basis points is possible if coming economic data disappoints, a point also made by economists at Standard Chartered. Finally, our most pessimistic panelists, such as Danske Bank, now expect a total of three rate cuts to be delivered before year-end: in July, September and December.

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