Fed to cut by 25 bps, not 50 bps, 2-4 possible dissenters

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Fed to cut by 25 bps, not 50 bps, 2-4 possible dissenters

  • At the 30-31 July meeting, the Fed is highly likely to cut rates by 25 bps, neither 50 bps nor holding rates steady. Dissents however would amount to 2-4 voting members. These are on account of the previous FOMC meeting (18-19 June), Fed Chairman Powell’s testimony (10-11 July), eye-catching FOMC voters’ speeches together with their interest rate forward guidance, and financial markets’ anticipations.
  • Compared to the 1-May FOMC statement, 19-June FOMC statement was substantially more easing. The latter left out “patient” stance but rather additionally mentioned “will act as appropriate” if needed and recognized mounting “uncertainties”, while citing “moderate” instead of “solid” economic activities. The Fed also revised down 2019 and 2020 projections of PCE inflation, which the Fed previously supposed was only transitory. Additionally, the minutes of 18-19 June FOMC meeting released on 10 July also pointed out that many members were worried about rising downside risks to the global economy and trade. These heightened the Fed’s actions to sustain the economic expansion if necessary.
  • Besides, the Fed further demonstrated highly dovish stance via Fed Chairman Powell’s semiannual testimony, 10-11 July. Fed Chairman markedly cited that global concerns were weighing on US economic activities and outlooks. Despite US labor market seemingly solid, Jerome Powell mentioned trade tension uncertainties and global growth concerns together with domestic decelerations in fixed investment, housing, and manufacturing, and inflation persistently muted than anticipated (also see Chart 1, Chart 2, and Chart 3).
  • A critical FOMC voting member, who is typically ‘neutral’ towards monetary policy and previously saw no rate cuts, alternatively signaled to support preventive cuts. Considering the speeches of eye-catching FOMC voting members whose stances are neutral and saw rates unchanged through 2019 as in Fed’s mid-June dot plot (also see Chart 5), especially Fed Vice Chairman and New York Fed President Williams and Boston Fed President Rosengren. The former seemed to alter his view as signaling to back preemptive cuts. He stated that “it’s better to take preventative measures than to wait for disaster to unfold.” Meanwhile, the latter, Rosengren, still saw no rates cut needed. Furthermore, even St. Louis Fed President Bullard, the most dovish among the current FOMC voting members, previously still insisted that a 25-bps cut in July would be adequate as an insurance cut, while 50 bps would be excessive. This could imply that a 50-bps cut is exceedingly unlikely this time.
  • Moreover, Fed communications and market expectations, which were previously considered overpriced, seem to converge over time. Prior to 3 June 2019, in which one of the FOMC voting members, St. Louis Fed President Bullard, mentioned a rate cut for the first time since the US interest rate path turned from gradual to no more hikes, rates held unmoved became clearly more likely than cut (also see Chart 4). Afterwards, rate-cut probability started to rise beyond rate-unchanged probability. Rate-cut likelihood reached 100% on 19 June upon the FOMC statement that was decisively dovish as aforementioned (also see Chart 4). Recently, rate probabilities implied from Fed funds futures as at 30 July 2019 were 78% 25 bps cut, 22% 50 bps cut, and 0% rates unchanged. Such 0% rate-unchanged likelihood since 19 June could indicate that if the Fed surprises markets by holding rates steady, markets possibly will harshly panic. Hence, rates being held unmoved at this meeting is considered substantially unlikely.
  • Additionally, by considering the latest forward guidance on the US interest rate path, i.e. Fed’s June dot plot (also see Chart 5), and the recent speeches of FOMC voting members as mentioned earlier, there could possibly be 2-4 dissenters, i.e. voting against the FOMC action that is assumed to be a 25-bps rate cut at the July meeting. So far, inferring to speeches, it is quite certain that there will be at least 2 dissents since Kansas City Fed Chairman George and Boston Fed Chairman Rosengren still resisted unnecessary rate cuts as soon as in July, whereas New York Fed President Williams seemed to already lean towards rate reduction. Given Fed Governors Bowman and Quarles do not change their stances as most of the major existing and forward-looking economic triggers should be considered in the June dot plot, the highest possible voting dissents will be 4. Nonetheless, higher the voting dissents are, higher the uncertainty of the interest rate path will be.
  • In addition, former Fed chairpersons Greenspan and Yellen also appeared to support rate cuts as a precautionary monetary measure on weakening global economy and subdued inflation.

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