Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a Senate Banking Committee hearing in Washington, D.C., on Thursday, July 11, 2019.
Andrew Harrer | Bloomberg | Getty Images
Most major Wall Street economists are in agreement that the Fed is going to cut rates by another quarter point at the conclusion of its two day meeting on Wednesday.
The Federal Reserve cut its key interest rate by a quarter point at its July meeting which was the first rate cut by a central bank in over a decade.
“Since the Committee delivered its first 25bp (basis points) cut in July, the Fed leadership has continued to highlight uncertainty about the growth outlook and pledged to ‘act as appropriate’ to sustain the expansion, making another rate cut a near certainty,” Goldman Sachs economist Jan Hatzius said.
But where the economists differ is what the Fed will do going forward.
“Beyond the September meeting, we continue to expect the Committee to deliver a third and final cut in October, concluding what [Chairman Jerome] Powell termed a ‘mid-cycle adjustment’ of 75bp of total easing,” Hatzius said.
The worsening economy all but guarantees that a September rate cut won’t be the last according to one firm.
“With accumulating evidence that the economy is slowing amid greater sensitivity to trade turmoil, we recently adjusted our call to reflect a further cumulative 75bps of rate cuts after [Wednesday’s] reduction. Following the September meeting, we expect 25bp rate cuts at the October, December and January meetings,” Deutsche Bank economists said.
However, this may be the last rate cut for a while, if the so called “dot plot” is to be believed, according to J.P. Morgan economist Michael Feroli. The “dot plot” is the chart the Federal Reserve uses to convey its outlook.
“We believe the median interest rate ‘dot’ projection will indicate no further easings are expected this year, and that policy rates are expected to be on hold next year as well,” he said.
Here’s what else Wall Street economists expect from the Federal Reserve meeting:
“We expect the Fed to cut rates by 25bp again, and for the statement to maintain its ‘ready to act’ message, but fall short of indicating that a further cut is a ‘done deal’. The dot plot may be quite confusing and will need clarification from the Chair in the Q&A. Expect the Q&A to be laden with questions about downside risks from trade and the policy response as the media will test Powell on how strong his do-whatever-it-takes message is. .. .We expect an additional 25bp cut to follow at the October 29-30 meeting.”
“Since the Committee delivered its first 25bp cut in July, the Fed leadership has continued to highlight uncertainty about the growth outlook and pledged to ‘act as appropriate’ to sustain the expansion, making another rate cut a near certainty. While the bond market had at times flirted with the possibility of a larger cut, there appears to be only minimal support for a 50bp cut on the FOMC. Beyond the September meeting, we continue to expect the Committee to deliver a third and final cut in October, concluding what Powell termed a ‘mid-cycle adjustment’ of 75bp of total easing.”
Bank of America
“We believe the Fed will cut 25bp at the upcoming meeting and guide toward further rate reductions. .. .Unlike in July, we think Chair Powell will strike a more dovish tone. .. .We think the Committee will send a clear signal that they are conducting a “mid-cycle adjustment” with the median moving to 1.625% from 2.375%, implying 75bps of easing this year. Thereafter, we expect the FOMC to show it will hold rates at these levels through 2020 before signaling a gradual tightening in 2021 and 2022.
“We expect the FOMC to cut rates by another 50bps between now and the end of the year (25bps each in the September and October meetings), but won’t be surprised by a 50bp cut in September or even an intermeeting cut if market conditions deteriorate sharply or if US labor market data suddenly show significant weakness. The trade war continues to intensify, and we believe this is the main risk that will drive further Fed easing. .. .Chair Powell is likely to leave the door open for further cuts by reiterating that the Fed will act as appropriate to “sustain the expansion.”
“We expect the Fed to cut the target range for the federal funds rate 25 bps to 1¾ to 2%. With the deteriorating global outlook, the weak jobs report, and public commentary from doves, there will be an argument made for 50bps. But, we know from the July minutes that roughly half the FOMC participants didn’t want a cut then, and recent commentary show many of them to still be in that mindset—there will also be an argument for no cut.”
“All told, the meeting should keep the door open for additional easing over the next few months. .. If, as we expect, the FOMC delivers another 25 bps rate cut on September 18, then the mid-point of the target range for the fed funds rate will indeed stand at 1.88%. Although it may be a stretch to expect that 9 FOMC members will shift their dot down another 25 bps, we think that a sizeable number, maybe 6 or 7, will shift down to 1.63% by the end of 2019. Such a shift would suggest that another 25 bps rate cut by the end of the year is a real possibility.
“We expect the FOMC to cut the federal funds target range by 25bp to 1.75-2.00% at the 17-18 September policy meeting. We look for one more 25bp rate cut at the subsequent meeting in October.”
“Our own base case remains one more cut this year after September and we still see a substantial likelihood of two. However the latest developments on trade / Brexit have raised the possibility that the next move may be postponed from October to December.”
“We believe the median interest rate ‘dot’ projection will indicate no further easings are expected this year, and that policy rates are expected to be on hold next year as well. We expect the statement will continue to note that ‘uncertainties about [the] outlook remain’ which the Fed ‘will continue to monitor’ and ‘will act as appropriate to sustain the expansion.’
“We do not expect the September rate cut to be the last of this cycle. With accumulating evidence that the economy is slowing amid greater sensitivity to trade turmoil, we recently adjusted our call to reflect a further cumulative 75bps of rate cuts after [Wednesday’s] reduction. Following the September meeting, we expect 25bp rate cuts at the October, December and January meetings.”
“The market consensus surrounding the upcoming monetary policy deliberations is that the FOMC will undertake a second midcourse correction and lower the Fed Funds rate target by 25 basis points, establishing a new 1.75% to 2% target cone centered around 1.875%. Older readers may remember that NASA only needed one midcourse correction on its way to the moon, but the Fed seems to need repeated corrections if the consensus view of a December rate cut also comes through. The really interesting thing about the market’s Fed call is that no one, including the Fed, seems to be able to articulate a good reason why short rates are being lowered.”