Fed: An  insurance cut of 25 bps and one or two dissenters – Rabobank

On Wednesday, the Federal Reserve (Fed) will announce its decision on monetary policy. Analysts at Rabobank expect the Fed to cut the target range for the federal funds rate by 25 bps. They think the risk of one or more additional insurance cuts in the coming quarters is substantial.

Key Quotes:  

“We expect the FOMC to make an insurance cut of 25 bps to the target range for the federal funds rate at the July Meeting. However, we think that a larger cut, more specifically 50 bps, is unlikely. After all, the Fed sees a cut to the target range at this point as an insurance cut, instead of part of a full-blown cutting cycle. This means that they do not think that the economy is falling  off a cliff in the near-term.”

“Although we expect the Fed to cut this week, we may see one or two dissenting votes. Eric Rosengren (Boston Fed) said on July 19 that as long as the economy is doing well, we don’t need accommodation. Esther George (Kansas City Fed) said on July 17 that the outlook has not changed since June when she supported the decision to hold rates steady. Loretta Mester (Cleveland Fed) may also disagree with a July cut, but she doesn’t vote in 2019.”

“Even if the Fed were to add more insurance cuts, we think that they will not succeed in averting the next recession. In fact, since November last year we have a full-blown cutting cycle in our baseline Fed forecasts for 2020 on the expectation that the US economy will fall into a recession in the second half of next year.”