Fed will most likely cut rates next week – Nordea

According to analysts at Nordea Markets, the US Fed will most likely cut rates for a third consecutive time next week and a lot of attention will be given to Powell’s wording of possible future rate cuts and whether recent liquidity announcements are in fact QE or not.

Key Quotes

“We expect the Fed to cut for a third consecutive time at next week’s FOMC meeting. When re-assessing the three reasons the FOMC gave in July and September for cutting rates – i)  signs of deceleration in  economic activity, ii) prudency from a risk-management perspective and iii) the inflation outlook  –  we think a rate cut is warranted.”

“Key figures have clearly turned to the worse since the September meeting. The latest ISM prints from both the  manufacturing  and non-manufacturing sector were big disappointments, while, for instance, the long-term inflation expectation measure from Michigan University reached an all-time low.”

“Overall, we think there should be little doubt that the Fed will cut again next week even though the Bloomberg consensus a bit surprisingly, in our view, roughly indicates a 50/50 spit between economist projecting a cut and being on hold.”

“If the Fed is by any means true to its word of being data dependent, a cut will be delivered. A conclusion that is firmly shared by the markets which price in a rate cut probability of ~90%.  The Fed has never failed to deliver a cut with such a high probability.”

“In contrast to the September meeting, we do not expect the Fed to cut its two other key rates – the interest on excess reserves (IOER) and the overnight reverse repo rate (RRP) – by  morethan 25 bp (both were cut by 30 bp in September).”

“The Fed will most likely again be divided in its decision to cut rates by 25 bp. We expect both George and Rosengren to dissent wanting rates unchanged, while Bullard could favor a 50 bp rate cut (only taking 2019-voters into account here).”