Fed: Tactical 50bp move is possible – ABN AMRO

Bill Diviney, senior economist at ABN AMRO, suggests that their base case remains that the Fed will cut by 25bp.

Key Quotes

“While the case for easing is strong – inflation is muted and expectations are falling, and the downside risks to the outlook are elevated – current macro conditions in the US remain solid, on the whole, and therefore do not warrant an aggressive policy response. However, Chair Powell strongly hinted that a 50bp cut was on the table by seemingly endorsing academic research making the case for earlier, more aggressive policy moves when policy space is limited. As a result, we do see a risk that the Fed cuts by 50bp in a tactical move, to get the ‘most bang for buck’.”

“Whether the Fed cuts 25bp or 50bp in July would therefore not alter our view of the total policy easing we expect from the Fed – 75bp by Q1 2020.”

“Chair Powell made it clear last week that US-China trade negotiations were not the only factor driving Fed policy. We think that much of the damage from the trade war is done, in weaker confidence and elevated uncertainty, and that the Fed will ease regardless. What a G20 deal this weekend could do is lower the chance of a 50bp move in July, and potentially reduce the amount of total easing the Fed implements. However, we do not think a US-China deal would derail rate cuts altogether.”