A divided Fed is expected to cut rates further – UOB

Senior Economist Alview Liew and Head of Markets Strategy Heng Koon How at UOB Group assessed the recent FOMC event.

Key Quotes

“The FOMC, as widely expected, cut its policy Fed Funds Target Rate (FFTR) by 25bp to a range of 1.75-2.00% in its Sep meeting, but it was not a unanimous decision as there were three dissenters: Boston Fed President, Eric Rosengren and Kansas Fed President, Esther George dissented for the second consecutive meeting because they wanted to keep rates unchanged. In contrast, St Louis Fed President Bullard dissented because he wanted to cut FFTR by 50bps instead of 25bps”.

“But the split within the ranks of the Fed Reserve has intensified based on 1) the increase in number of dissenters within the FOMC voters and 2) the emergence of three distinct groups of FOMC participants according to the Sep Dotplot’s 2019 FFTR projection. If the lack of consensus (widening of differences) worsens further, then that will complicate the FOMC outlook and weaken the case for lower rates for the rest of this year”.

“There was no material change in the text of the Sep FOMC statement with the Fed keeping its pledge to “act as appropriate to sustain the expansion” which still keeps the door open for the Fed to rate cuts. In his press conference, FOMC Chairman Powell said the Fed lowered interest rates to keep economy strong, provide insurance against risks, but he still did not commit to further rate cuts, only “moderate rate adjustments.”

“After delivering the two 25bps cuts in Jul and Sep, we still project two more 25bps “insurance” rate cuts at the 29/30 Oct and the 10/11 Dec FOMC, bringing the upper bound of the FFTR lower to 1.5% and well below the 2% inflation target. But the split within the ranks of the Fed Reserve adds uncertainty to our call. We are still confident of the Oct rate cut but have lowered the probability of a Dec rate cut from 75% to 55%”.