US Fed’s Monetary Policy Path in 2020 to be Data-dependent

The US Federal Reserve (US Fed) lowered its Federal Funds rate (FFR) by 25bps to a range of between 2.00-2.25%, as widely expected, after leaving it unchanged since December 2018. This was also the first rate cut since December 2008. In its statement, the US Fed guided that its decision of rate cut was “in light of the implications of global developments for the economic outlook as well as muted inflation pressures”. On the US domestic economy, it guided that the “labor market remains strong and that economic activity has been rising at a moderate rate.” Although US Fed still expects continued expansion of economic activity, it guided that “uncertainties about this outlook remain.” The US Fed also highlighted that it will “conclude the reduction of its aggregate securities holdings in the System Open Market in August, two months earlier than previously indicated”. Recall that the US Fed was supposed to be reducing its balance sheet by the maximum size of US$50bn per month until September 2019.

On the inflation front, the Fed guided that “inflation will likely be near symmetric 2% inflation objective.” We believe this reflected in the recent upward trend of core-PCE, the US Fed’s preferred measure of inflation, which accelerated in June to 1.7% yoy, after maintaining a steady pace of 1.5% since March 2019. We believe that the decision to cut FFR was a pre-emptive move as recent data has been mixed, where downside risk to the US economy may have heightened. Fed Reserve Chairman guided in a press conference that the rate cut was to “insure against downside risks”. For instance, in 2Q19, US real GDP growth slowed to a near-two-year low of 2.1% after a robust expansion of 3.1% in 1Q19, weighed down by a decline in gross private domestic investment of 5.5% due to concerns over trade war uncertainties. This was despite the strong growth of personal consumption expenditures of 4.3% in 2Q19. Besides that, business sentiment has also softened, according to IHS Markit’s Manufacturing PMI, which fell to 50 in July from 50.6 in June, its lowest reading since September 2009. In contrast, the job market remains robust, where in June, nonfarm payrolls increased to 224k from 72k in May, but we believe the strong nonfarm payrolls may not be sustained. Going forward, we believe the US Fed will likely cut its FFR one more time by 25bps sometime in the 4Q19 FOMC meetings, especially if economic indicators in the coming months show more signs of a weakening US economy, amid the backdrop of slowing global growth. This would be in line with its effort to “act as appropriate to sustain the expansion”. The remaining FOMC meetings in 2019 are in 17-18 September, 29-30 October and 10-11 December. As for 2020, we believe that the US Fed will remain data dependent in determining its future monetary policy path.

Source: Affin Hwang Research - 1 Aug 2019