The Fed: Rate Cuts in 2019


The Fed: Rate Cuts in 2019

Employment growth cooled noticeably in May, supporting our view that the Fed will cut rates in 2019, lowering the funds rate by 25 basis points at both the September and October Federal Open Market Committee (FOMC) meetings. Moreover, we do not rule out the possibility that the Fed could ease sooner (and further) if downside risks to the economic outlook continue to increase.

The building case for rate cuts

Inflation remains below the Fed’s 2% target.  While the Fed has characterized the recent deceleration as “transitory”, we expect the core personal consumption expenditure (PCE) inflation rate to finish the year at 1.6%, exactly where it stands today.

Meanwhile, the recent escalation in the trade war has called our previously upbeat outlook for the US economy into question.  We believe ongoing uncertainty surrounding recent (and future) tariff developments will lead firms to adopt a wait and see attitude.

Business investment has begun to soften. If companies also pullback on hiring, then a weaker job market will eventually undermine consumer spending.  We now look for real gross domestic product (GDP) growth to remain at or below trend over the coming six to eight quarters.

If the trade situation with China were to be (unexpectedly and quickly) resolved, we still believe lingering uncertainty over a renewed flair up would keep firms cautious.  Thus, even under a “best case” scenario, we do not expect the US economy to regain upward momentum over the second half of the year.  As growth cools and inflation remains below mandate, the case for the FOMC to undertake “insurance” cuts – a la the late 1990s – will mount.

A weaker-than-expected payroll gain in May strengthens the argument for a rate cut but does not necessarily suggest urgency for the Fed to act. Our forecast calls for 25 basis points cuts in both September and October. At next week’s FOMC meeting, we believe the Fed will indicate its willingness to act. The data and/or developments on the trade front will then determine the timing of the first rate cut. If conditions deteriorate or downside risks rise, the Fed could take action in July.


 

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

 

10th June 2019

Authors:

Michelle Girard
US Chief Economist

Kevin Cummins
Senior US Economist

Set Tab for lightbox