Interest Rate in USA

USA - Interest Rate

Fed cuts federal funds rate in July for first time since the financial crisis

At its 30–31 July monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) voted to cut its target range for the federal funds rate to 2.00%–2.25%. The move, considered to be a preventive measure to soften the effects of intensifying external headwinds, was the first rate cut since 2008. In tandem, the FOMC announced it would end the reduction of the USD 3.8 trillion asset portfolio two months earlier than planned. The decision was widely expected by market analysts following dovish comments made by Fed Chairman Jerome Powell and other members earlier in the month. The rate cut was not unanimous however, as two of the ten governors voted to keep the federal fund target range unchanged.

The Fed highlighted the risk of growing uncertainties to the economic and inflation outlook, despite the recent slew of positive economic data confirming that the labor market is tight and economic growth remains moderate. Although Q2 GDP surpassed expectations thanks to robust consumer spending, the Fed noted that business fixed investment, which contracted in Q2, remained feeble. Fed policymakers have expressed concern over the impact of opaque trade policies on global growth and Powell noted at a conference in Paris that, while the U.S. economy is sustaining its record-long expansion, it could be vulnerable to a broader global slowdown and the trade dispute with China. The prospect of a near-future breakthrough in trade negotiations between the U.S. and China remains slim, despite the decision to resume talks in July, as officials have failed to hurdle core disagreements. Consequently, the protracted trade war is likely to persist for the time being. Moreover, subdued inflationary pressures gave the Fed additional ammunition in its decision: Inflation has persistently run below the Fed’s 2% target, while market measures of inflation expectations have also remained low.

The Fed sent mixed signals regarding the future interest rate path. Powell mentioned that the economic data does not necessarily call for an easing cycle. However, the FOMC stated in its press release that it contemplating the future path and that the Fed would “act as appropriate to sustain the expansion”, suggesting that it is considering additional easing. The ”hawkish cut” and Fed’s lack of a clear-cut projection likely served to taper market expectations, which had priced in an additional three rate cuts before the July meeting. Despite the Fed’s cautious stance, many FocusEconomics panelists continue to foresee more rate cuts ahead, however.

Analysts at Nomura have penciled in an additional quarter-point cut in October, explaining:

“The resilience of recent economic data and ongoing divisions within the FOMC reduce the likelihood that they will cuts rates again in September. We expect an additional drag on growth from other aspects of policy to contribute significantly to a second cut later in the year. Even with the agreement to lift spending caps and suspend the debt limit, Congress and President Trump still have to reach an agreement on spending priorities for the next fiscal year. Another US government shutdown in October remains a possibility. We continue to expect US-China trade talks to break down later this year. The ongoing Brexit uncertainty may also prove to be a modest drag on the US economy. This all suggests there is room for additional easing in October.”

Taimur Baig, chief economist at DBS, also explained that external uncertainties could press the Fed to lower rates again:

“Notwithstanding the knee-jerk market reaction to a “hawkish cut,” the FOMC has left room for further policy cuts this year. […] We think that all that’s needed for another Fed funds rate cut is no resolution in trade wars and listless asset markets.”

Analysts at Unicredit, on the other hand, forecast two rate cuts this year, stating:

“Reflecting our forecast for GDP growth to slow further in the coming quarters, we continue to expect further rate cuts of 25bp in September and December this year, followed by two cuts in 1H20, which should take the target range for the federal funds rate to 1.00-1.25% by end-2Q20.”

The majority of FocusEconomics Consensus Forecast panelists expect one more 25 basis-point cut before the end of the year and see the federal funds rate ending 2019 at 2.09% and 2020 at 1.92%.