Fed: Too much growth risk, too little inflation – Standard Chartered


Sonia Meskin, US economist at Standard Chartered, suggests that they have lowered their 2019 forecast for the upper bound of the fed funds target rate (FFTR) to 2.00% from 2.50% and now see a 25bps cut in July and another 25bps cut in December.

Key Quotes

“We also lower our 2019 core PCE forecast to 1.7% (from 2.0%) as we expect recent inflation weakness to persist due to technical changes through H1-2019; our 2019 GDP forecast is unchanged. We expect GDP growth to weaken in H2-2019 on ongoing trade tensions and slower job gains, though a stronger-than-expected Q1-2019 GDP print should help offset this on net for the year.”

“We believe that the FOMC is concerned that trade tensions with major US partners, including China, Mexico and the EU, will persist and continue to dampen sentiment and real activity. In FOMC – Cuts now likely but not certain, we laid out three conditions necessary for the Fed not to cut rates. All three are flashing yellow, so even though they may not be fulfilled, we think the Fed is sufficiently concerned to act pre-emptively, given below-target inflation prints.”

“We expect the June FOMC meeting to tee up for a cut in July, after the G20 meeting. We think the FOMC will remain data-dependent with respect to another insurance cut in 2019. Another cut in December is our base case at this stage, as we believe that growth and inflation are unlikely to surprise meaningfully on the upside and trade tensions are unlikely to abate.”

“For the June FOMC meeting, we anticipate that the Summary of Economic Projections (SEP) will show a median projection for one 25bps cut in 2019 plus some probability of a second cut. A median projection of two full cuts in 2019 would be a very dovish tilt for the current Committee, in our view. However, a median projection for another cut in 2020 would indicate a moderately dovish tilt.”

“We expect the FOMC’s median core PCE projection to be revised down to 1.7% for 2019 and 1.9% for 2020. We do not expect a significant growth downgrade but anticipate that the statement will describe the Committee as “ready to act as appropriate to sustain the expansion” rather than remain “patient”.”

“We believe there is a strong chance that the FOMC will end the balance sheet taper before September, likely in June but possibly in July instead of engaging in further interest on excess reserves (IOER) cuts.”

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