Economists who predicted the rate cut are now utterly confused about what the Fed does next

“Today’s guidance suggests Fed will likely provide additional accommodation in coming meetings to support inflation and offset the downside risks in the outlook. They will likely put more emphasis on global economic conditions as they appear to be worried about the potential spillover effects from weakening global growth through weaker US manufacturing activity. Given today’s Fed decision and guidance, we remain comfortable with our view that the Fed will provide two more 25bp cuts this year (September and October).”

“One modest dovish surprise is the early end to balance sheet run-off. The FOMC kept the door open for future cuts, but Chair Powell downplayed the likelihood of a prolonged easing cycle. We continue to expect that this will be the only rate cut and policy will be on hold for the rest of 2019.”

“While the FOMC’s decisions and its statement were largely in line with what was expected, Chair Powell’s press conference generated a notable repricing of many financial markets. Chair Powell said that today’s action was a “mid-cycle adjustment” to policy and not the beginning of a “lengthy cutting cycle.”

“While this may not be the start of a full easing cycle as Chair Powell underscored, we expect the FOMC will deliver one additional 25bp rate cut before year end, and our base case is that the next rate cut will come at the October 29-30 FOMC meeting. Thereafter, we expect policy will remain on hold.”

“The FOMC statement introduced a bit more ambiguity about a possible second cut in September by slightly watering down its “act as appropriate” policy guidance. In the press conference, Powell said that the FOMC intends its
“mid-cycle adjustment” to “adjust policy to a somewhat more accommodative stance over time,” language we see as consistent with our expectation that easing will end with a second 25bp cut. We continue to see a 55% chance of a 25bp cut in September, a 5% chance of a 50bp cut, and a 40% chance of no cut. We see an 80% cumulative probability of another cut at some point this year.”

“The FOMC’s first rate cut in over a decade – fully expected and priced in – completes the Fed’s abandonment of the “star” framework and highlights its lack of a new policy narrative. We continue to view monetary policy through the lens of the “whimsy” Fed, i.e. a lack of independence from markets: intimidated by tighter financial conditions if it pushed back against market expectations (a small version of which was seen during the press conference yesterday), the Fed is forced to follow them instead. In this sense, more cuts are in the cards unless the Fed is bailed out by very strong fundamental data.”

“Fed events may have given risk markets a little indigestion, but they also bought the Fed a little more flexibility going into the next FOMC meeting. We still look for one more easing in September, and continue to believe that, unlike today’s meeting, the call on September depends on all of the data. While today’s move was motivated by global growth, trade policy and inflation developments, we expect September’s decision will also depend on domestic growth developments.”

“We continue to look for one additional 25 bps rate cut, probably at the October 30 policy meeting. Today’s policy action should be viewed as an “insurance” rate cut. In the context of uncertainties about the economic outlook and below-target inflation, easier policy seems to be warranted. In our view, another 25 bps rate cut would constitute additional “insurance” against a more pronounced slowdown.”

“The FOMC cut 25bp; further cuts possible but not likely. The statement clearly leaves open the door for future rate cuts if the domestic data were to deteriorate, but there was precious little indication of a strong desire for more immediate action. The two dissents were expected and do not give much signal on future action….If the Chair could not pull the Committee to 50bp today or even a strongly dovish tilt, we see it as unlikely that he can pull them to cuts in subsequent meetings. That said, data are volatile; a few bad prints between now and September could intensify extant fears and lead to another 25bp cut in September.”

“The developments of the July FOMC were hawkish relative to very dovish market expectations – but consistent with our base case for just a 50bp total downward adjustment in policy rates. We continue to think that strong domestic data will mean that the FOMC does not embark on a full cut cycle and expect just one further 25bp cut in 2019, most likely in September.”

“While policy outcomes going forward will be driven by data and events, we think the bar for the Committee to remain on hold in September is relatively high. In particular, to not cut the Committee will likely need to see notable improvements on the various headwinds they have emphasized – slowing global growth and trade uncertainties – and evidence that inflation pressures are building more rapidly than anticipated. These pre-conditions are unlikely to be in place by the next FOMC meeting. Further, global headwinds are likely to persist in the months beyond, with increasing evidence of spillovers to the domestic economy. As such, we maintain our expectation for two more cuts this year in September and December.”

“In our view, the Fed signaled a willingness to enact further policy rate cuts to support the outlook. The Fed faced two communication challenges today. First, it had to signal that it had not lost confidence in the outlook, but saw a reason to adjust the policy stance in light of downside risks. We felt this was accomplished. Second, it had to signal to markets that further rate reductions are likely to be appropriate while also retaining some optionality and an adherence to a data-dependent mantra. Communicating forward guidance was clearly more challenging, as markets appeared to struggle with Powell’s characterization of a “mid-cycle” adjustment in the policy stance and prolonged rate cut cycle driven by recession risk.”