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Sonia Meskin, US economist at Standard Chartered, suggests that for the FOMC, while the number of hikes remaining in this cycle still matters, the Committee appears less concerned about the precise level of rates at which the US economy enters the next downturn than about other potential policy tools.

Key Quotes

“We believe the dovish FOMC shift occurred in the context of downside risks to growth and a partial shift in its focus from currently still-strong cyclical momentum to the next downturn.”

“The Committee was taken aback by the combination of global growth fears and domestic market turmoil in Q4-2018. Continued escalation of these factors could have precipitated an economic downturn. While pressures across markets have abated, the FOMC has clearly shown that it is more worried about the downside than upside risks to the global economy.”

“In addition, given that the US economy and investors may be unable or unwilling to tolerate real rates far from the zero lower bound (ZLB) at this late stage of the cycle, the Committee must actively consider other tools for the next downturn. Studies suggest that a relatively frequent encounter with the ZLB is associated with lower inflation expectations and sub-optimal real growth outcomes.”