Insights

Fed holds fire, but July rate cut likely

Although the US Federal Reserve kept rates unchanged this month, the direction of travel is towards easier policy. Whether this will be enough to restore corporate confidence and spending may depend as much on the president as the Fed.

26 September 2019

Keith Wade

Keith Wade

Chief Economist & Strategist.

The Federal Reserve (Fed) did not cut rates at its June meeting, but is moving in the direction of easier policy.

We think an “insurance” rate cut is likely in July, so-called because it is a move designed to help support the economy in the event that downside risks materialise

The Fed did not alter its growth forecasts and still expects inflation to be close to target, but cited an increase in uncertainties about the outlook. Moreover, the committee tilted in a more dovish direction as the projections revealed that eight members would now like to cut rates this year, with one looking for an immediate cut of 25 basis points (bps). Against this, eight wanted no change and one voted for a 25 bps hike.

We now expect the Fed to make an insurance cut of 25 basis points in July. This is in line with Chair Jerome Powell’s comment in his press conference that “an ounce of prevention is worth more than a pound of cure”.

It is possible that the data will strengthen between now and then, but this seems unlikely as we expect Q2 figures to remain soft as firms cut inventory and capital spending. We might also see a favourable outcome from the Trump-Xi meeting at the G20, although the risk of tariffs will remain high given the distance between the two sides on issues such as intellectual property and technology. The July move could be followed by a further cut in September. 

Looking further ahead, easing will depend on whether Powell’s insurance cuts are enough to restore confidence and spending in the corporate sector. That may depend as much on the president as the Fed as confidence is critical at this stage of the economic cycle.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.