The Fed moves into a ‘wait-and-see’ mode – UOB

Senior Economist at UOB Group Alvin Liew reviewed the recent FOMC event, where the Committee reduced the FFTR by 25 bps.

Key Quotes

“The FOMC, as widely expected, cut its policy Fed Funds Target Rate (FFTR) by 25bps to a range of 1.50-1.75% in its October meeting, but it was again not a unanimous decision as Boston Fed President, Eric Rosengren and Kansas Fed President, Esther George both dissented for the third consecutive meeting because they wanted to keep rates unchanged”.

“The material change in the text of the October FOMC statement was the removal of the Fed Reserve’s pledge to “act as appropriate to sustain the expansion” but said the Fed “will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.” Markets took this as a “subtle” signal that there is possibly now a higher bar for further rate cuts”.

“In his press conference, FOMC Chairman Powell said today’s rate cut was insurance against risks, but he did not commit to further near term rate cuts. Powell believes that [US] monetary policy is in a good place, and the current stance of monetary policy as likely to remain appropriate. And while Powell’s optimism seems to lower the chances of additional Fed rate cuts, Powell also gave the assurance that there needs to be a materially significant rise in inflation for the Fed to go the opposite direction and start raising rates”.

“After reviewing the latest developments and without further update to the Fed policymakers’ rate trajectory preferences via the Dotplot in the latest decision, we have moderated our view and now expect the Fed to pause (instead of cut) in the 10/11 December 2019 FOMC decision and only implement the next rate cut in 1Q 2020. We have not factored in further cuts in 2020 but, if trade tensions persist beyond 2019 and into 2020, then we think the Fed will have to take on more easing in 2020, especially if it leads to material downside impact on US and global growth”.