US Fed Cuts Its Federal Funds Rate by 25bps to 1.75-2.0%

The FOMC dot plot suggests no further rate cuts in 2019

The US Federal Reserve (US Fed) lowered its Federal funds rate (FFR) by 25bps to a range of between 1.75-2.0%, in line with market expectations, its second rate cut in 2019. In the latest assessment, the US Fed guided that its decision to lower the FFR was due to “implications of global developments for the economic outlook as well as muted inflation pressures”, the same rationale given in its previous statement for a rate cut in July this year. The US Fed also guided that this was to support sustained expansion of economic activity and strong labour market conditions although uncertainties to this outlook remain. The Fed also highlighted that household spending has been “rising at a strong pace” while business fixed investment and exports have weakened. On the inflation front, the US Fed continues to expect “inflation near the Committee’s symmetric 2% objective” is the most likely outcome despite core-PCE remaining below the 2% inflation target since the start of 2019.

In the latest FOMC Summary of Economic Projection, the Fed revised its GDP growth forecast higher from the June FOMC meeting, from 2.0-2.2% to 2.1-2.3% in 2019. The projection for unemployment rate was unchanged at 3.6-3.7%. Meanwhile, on the inflation outlook, the median expectation of PCE inflation remained unchanged at 1.5%, while core PCE inflation projection was maintained at 1.8%.

Going forward, according to the US Fed statement, the latest FOMC dot plot suggests no further FFR cuts this year, any possibly in 2020. This differs slightly to the previous FOMC dot plot in June, when it projected no policy changes in 2019 but one rate cut in 2020. Nevertheless, we believe the decision on the future direction of the target federal funds rate will be data dependent, especially on the state of the US economic performance. We believe the Fed’s latest decision to cut rates was an “insurance cut” as recent economic indicators have been mixed, such as US retail sales, which rose more than expected by 0.4% mom in August (0.8% mom in July). However, in the US job market, nonfarm payrolls slowed to 130k in August, down from 159k in July, its slowest increase since May 2019.

Although a significant slowdown is not apparent yet in the US economy, we believe that if incoming economic releases continue to signal an across the board economic slowdown, this may prompt the US Fed to cut its FFR further. We also expect the US Fed to monitor the developments of the trade talks between US and China as well as other external events such as Brexit and geopolitical risks. Currently, there are no guidance given on the possible resumption plan of an expansion in US Fed’s balance sheet (i.e QE), despite intervention in repo market. The remaining FOMC meetings in 2019 will be on 29-30 October and 10-11 December 2019. Going into 2020, we expect the US Fed’s decision on the future monetary stance to be tilted towards more easing, possibly another 50bps FFR cut in 1H2020.

Source: Affin Hwang Research - 19 Sept 2019