20 June 2019
The US central bank nudged its growth and inflation projections lower, and eight participants now view rate cuts as being appropriate this year - with seven of these expecting two rate cuts as their base case.
The press conference after the meeting highlighted concerns around the weak US manufacturing data, leading the Fed to conclude that the “outlook is less favourable”.
Fed Chairman Jerome Powell still thinks that the soft inflation data of late is transitory but he now expects inflation to rise more slowly back to target. Powell said the Fed is seeing “cross currents due to external weakness and trade uncertainty”. This means that while consumption is still strong, business confidence and business investment are slowing.
Extent of easing partly depends on Trump-Xi meeting
Overall the Fed has left its options open, stating that “uncertainties” around its benign outlook “have increased”.
While a July rate cut now looks very likely, the magnitude of that rate cut and the path beyond that is very uncertain indeed.
In part the degree of easing will depend on whether US President Donald Trump and China’s President Xi Jinping reach a ‘truce’ at the next week’s G20 meeting in Osaka. Just as important is whether the already-slowing US economy, due to fading fiscal stimulus and late cycle dynamics, leads to weaker activity than the Fed currently assumes.
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