September Fed meeting preview
The Federal Reserve (Fed) is very likely to cut rates again on 18 September, a follow-up to its 25-basis point (bp) rate cut at its last meeting in July. The explanation is likely to again be the need to take “insurance” against growing downside risks to the outlook, including from President Trump’s erratic trade policy as well as weaker foreign growth.
Fed Chairman Powell is unlikely to pre-commit to a third rate cut at this stage, even though we still think one is on the cards. The committee’s ‘dot plot’ could also only signal that two rate cuts are enough for now… But the dot plot is a red herring for the direction of rates and we should ignore it. Powell’s communication regarding the future path of rates could be made more difficult by the recent strengthening in inflation (especially in CPI data), signs of appeasement on the US-China trade front, as well as data at home reinforcing the ongoing resilience of the US consumer.
But we think Powell will continue to underscore that global growth is still a glass half empty rather than full; he will also likely hint indirectly that a potential truce with China masks still sizeable underlying uncertainty, worth addressing with a further rate cut. Once again, Powell will likely push back against Trump’s meddling in the Fed’s monetary policy, as Powell tries to maintain some semblance of independence. All the same, we think Trump’s pressure has some indirect influence on the Fed’s actions. It is a further reason to believe that the Fed will go ahead with a third rate cut – which we expect on 30 October – especially if global growth data stays wobbly.
From a fundamental perspective, we continue to think the Fed is in a ‘debt dominance’ regime, where high private debt will constrain the Fed’s actions and force it to remain dovish throughout the medium term.
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