Ahead of the highly anticipated FOMC decision, scheduled later during the US session on Wednesday, Mikael Olai Milhøj – Senior Analyst at Danske Bank – offered his take on the US central bank’s near-term monetary policy outlook.
“The Fed has made two U-turns in 2019. At the beginning of the year, the Fed skipped its plan to raise rates further. Then, since July, the Fed has cut rates three times and the target range is currently 1.50-1.75%. At the latest meeting in October, the Federal Reserve changed its forward guidance and now believes the current stance of monetary policy is appropriate. On the back of the Fed’s new ‘wait-and-see’ approach, we recently changed our Fed call and now expect only one more cut in 3-6M (previously three more cuts).”
“We keep a cut in our forecast profile, as we still believe the US economy is more fragile than the Fed believes and that the renewed trade optimism is unlikely to be enough to trigger a rebound in business investments yet.”
“In our view, monetary policy is not as expansive as one may think. In our view, the Fed cuts have taken the Fed funds rate down only to neutral or at best marginally accommodative. Without more easing, it also increases the probability that the Fed will need to cut all the way down to 0% as a response to a recession.”