Today, world markets will be keenly awaiting the outcome of the all-important Federal Open Market Committee (FOMC) monetary policy decision for the month of July, which will be announced at 1800 GMT. As we move towards the decision timings, here are the expectations as forecasted by economists and researchers of 12 major banks.
The consensus amongst most economists and analysts suggest that the Fed will deliver its first-rate cut of 25bps in over ten years and as a result, taking the Fed fund’s corridor rate to 2.00-2.25%.
Rabobank
“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.”
“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.”
TD Securities
“We expect the FOMC to deliver its first rate cut in over ten years, with a 25bp reduction in the Fed Funds target range. Given crosscurrents persist as a threat for the outlook and inflation remains subdued, we look for the Fed to leave the door open to further easing.”
“We expect the statement to show modest, mark-to-market changes and for two of the FOMC voters to dissent.”
ANZ
“The Federal Open Market Committee (FOMC) is expected to ease rates this week. We expect the central bank to cut its target rates by 25bps. We also expect an end to quantitative tightening.”
“Ongoing elevated uncertainty and weak domestic inflation mean that the FOMC will keep its easing bias.”
“We expect the FOMC to ease again at least once more, possibly October. At this stage, we are not expecting any further easing but the bias remains in that direction given that external risks remain elevated and inflation weak.”
ING
“Recent firm data has put pay to that view with the implied probability of such action drifting lower over the past couple of weeks. St Louis Fed President James Bullard, who is perceived to be one of the most dovish members of the FOMC having voted for a rate cut in June, has also downplayed that prospect. He said last Friday that “I’d like to go 25bp at the upcoming meeting”. Moreover, we have to remember that at the June FOMC meeting, the median forecast of FOMC members had no rate cuts for this year and only one for next.”
“The newsflow hasn’t deteriorated over the intervening period, so based on this we expect just a precautionary 25bp rate cut next Wednesday.”
Deutsche Bank
“Although a 25bps rate cut has been pretty much fully priced in, there is still a chance (or maybe a hope from many in the market) that it will be 50bps even if the Fed have done little to encourage such an assumption.”
“DB’s US economists are expecting a 25bp cut, before further cuts in September and December. Powell’s press conference will be key to how much the committee signals further cuts though. The domestic data has held up ok recently so it will be a hard balance to out dove a market baying for stimulus.”
Goldman Sachs
The US Federal Reserve (Fed) is widely expected to cut interest rates by a quarter-point to 2.00-2.25% on July 31. That would be an insurance cut – a proactive move to protect against growing downside risks, according to analysts at Goldman Sachs.
Notably, while market-implied odds are consistent with a turn in the cycle, Goldman Sachs analysts do not foresee Fed starting a full-blown easing cycle in the near-term.
“Our reasoning for policy easing – slowing growth against a backdrop of subdued inflation and elevated uncertainty – is consistent with the Fed’s reasoning for insurance cuts.”
Standard Chartered
“We expect the FOMC to lower the federal funds target rate (FFTR) by 25bps in July. We also see a growing prospect of a second 25bps rate cut in September (instead of December, our current forecast). We expect the description of the US economic situation in July’s statement to be broadly similar to that in the June statement.”
“That said, the statement and the press conference are likely to note heightened uncertainty over the growth outlook and describe the 25bps cut as a pre-emptive move. It is also possible – though not likely, in our view – that either or both will go a step further, raising the possibility of a series of consecutive cuts. We believe that the characterisation of inflation dynamics will indicate whether the Fed is likely to initiate a rate-cutting cycle or just limited pre-emptive cuts.”
“If the commentary emphasises growth concerns (in the context of muted inflation), this would indicate to us that the Committee will favour a further ‘insurance’ cut and then will wait to see whether the economy (and inflation) responds – unless stronger evidence emerges of a significant slowdown in global growth and a consequent impact on the US economy. If the FOMC believes the risk is high of a persistent inflation undershoot, a more sustained rate-cutting cycle will likely ensue.”
Nordea Markets
“We expect the Fed to cut its key interest rates by 25bp at next week’s FOMC meeting, taking the Fed fund’s corridor to 2.00-2.25% with a mid-point of 2.125% and an IOER rate of 2.10%.”
“There is a lot of uncertainty as to the monetary policy signals that will follow a 25bp rate cut, though. How to deliver a slightly dovish message when markets expect more than you want to do? Powell could repeat that the Fed stands ready to act again if needed, If the Fed does not believe that to be enough, we see two additional options: 1) balance-sheet normalisation could be slowed further or stopped altogether and 2) a “technical adjustment” of -5bp could be made to the IOER rate.”
“The Fed wouldn’t want to overdo the easing either as that would risk “confirming” fears of an upcoming US recession. Thus, we believe Fed will opt for unchanged medium-term policy signals: Generally positive on the economic outlook, but seeing huge risks in weaker growth abroad, trade war, slowing investment growth, weak inflation and Brexit, and standing ready to act should these risks materialise.”
Danske Bank
“We remain in the camp expecting the Fed to cut its target range by 25bp on Wednesday. While investors got very excited on Friday by NY Fed Chair John Williams’ seemingly dovish comments and at some point priced in a higher probability of a 50bp cut than a 25bp cut, it was very striking to us that a NY Fed spokesperson rejected the idea that Williams’ comments were about what the Fed will/should do at the upcoming meeting. This, combined with über dove St Louis Fed president Bullard’s view that a 25bp cut should be sufficient initially, means that we stick to our call that the Fed is more likely to cut by 25bp than 50bp. Markets have priced in an approximately 20% probability of a 50bp cut. Consensus among economists is for a 25bp cut but a few are calling for 50bp.”
Westpac
“While some market participants continue to argue the case for a 50bp cut, Westpac instead sees a 25bp cut.”
“Post-cut price action will depend largely on the combination of cuts and language used by the Fed, but our base case is that a 25bp rate cut will need to be accompanied by dovish guidance for it to sustain current 10yr UST yields or push them lower. Indeed, the fact that there are still credible forecasters holding onto the 50bp rate cut view suggests that risk rewards are skewed slightly toward higher yields on the announcement.”
ABN AMRO
“We and consensus look for a 25bp cut at this meeting, though there is some residual market expectation for a 50bp cut (none of the analysts surveyed by Bloomberg expect such a move). Given the dovish signalling from officials, the weakness in forward-looking indicators (particularly for manufacturing), and the persistence of downside risks to the outlook, we think a 25bp cut is a done deal. However, even the most dovish members of the committee (such as St Louis Fed President James Bullard) have expressed scepticism over a 50bp cut, so such an aggressive move looks unlikely.”
“The question therefore will be to what extent the Fed signals additional easing steps beyond what was signalled in June. With no update to the Committee’s projections at this meeting, it will be up to Chair Powell to steer market expectations via the press conference. Given that this will be the first rate cut since the financial crisis, Powell will likely want to make a robust case for the move, and will sound accordingly dovish.”
“We expect the emphasis to remain on the downside risks to the outlook, but reference will also be made to muted inflation and the possible de-anchoring of expectations, as well as the weakening in business confidence. All of this should support expectations for rate cuts, but we suspect he will struggle to ‘out-dove’ the market at this stage given what is already priced in (a further 65bp in cuts beyond the expected 25bp July move). We continue to expect an additional two 25bp cuts by Q1 2020 following the expected July cut.”
National Bank Financial
“In recent weeks, nine out of ten voting members of the FOMC have made public speeches. Among that group, seven have indicated their support for an easier policy stance. This leaves markets with little doubt that the Fed will deliver on July 31st.”
“Our expectations are for a 25-bps cut in the fed funds target range on Wednesday which should be seen as the first leg of a 50 bps “insurance policy”. So far, domestic data do not call for a more aggressive recalibration of the Fed’s policy stance. In that context, and in accordance with the FOMC view that interest rates are the principal tool of monetary policy, we think the Fed will stick to its original plan of concluding the reduction of its balance sheet at the end of September.”
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