FOMC review: Mid-cycle adjustment without pre-commitment – Danske Bank

Danske Bank analysts explain that as per expectations, the US Federal Reserve cut its Fed funds target range by 25bp to the range 2.00-2.25% (8-2 vote in favour).

Key Quotes

“A bit surprisingly, the Fed also decided to end its balance sheet reduction from today, a couple of months earlier than scheduled, but the decision is not a game changer. Based on the statement and press conference, there are mainly three reasons for easing: (1) higher (trade) uncertainty, (2) slower global growth and (3) inflation remains below 2%.”

“In line with our expectation,  the Fed repeated in the statement that it ‘will act as appropriate to sustain the expansion’, which we interpret as an easing bias suggesting more cuts may come. However, it is also clear that Powell & co will not pre-commit to more cuts  , which left markets disappointed and was slightly to the hawkish side also for us.  Powell did not rule out more cuts  at the press conference but in his base case he does not see the cut as the beginning of a long easing cycle but rather a mid-cycle adjustment (or insurance cut). Whether more will come will depend on data and the trade talks.”

“In our view, the Fed is still set to deliver two more cuts during the autumn (in September and December),  as data would probably warrant it and the Fed does not want to disappoint markets too much.”

“Given the Fed’s data dependency and focus on trade talks, it has become more difficult to predict monetary policy, which is more ad hoc than previously. Despite the US expansion now being the longest on record, the solid Q2 GDP growth and the low unemployment rate, we stick to our view that the benefits of easing monetary policy are now slightly greater than the costs of not easing monetary policy. Inflation remains on the low side and the uncertainty surrounding the macro outlook has increased.”