We expect the Fed to announce a rate cut of -25 bps, bringing the Fed funds rate target to 2-2.25%, this week. Yet, this decision is unlikely unanimous. Although there has been voice suggesting a deeper cut is needed, we do not it will happen this month. The plan for the balance sheet reduction would stay unchanged – the process is due to complete by end-September. At the accompanying statement, policymakers should upgrade the economic assessment in response to better data flow for June. At the forward guidance, we expect them to open the door for further easing when necessary.
GDP growth eased to an annualized +2.1% q/q in 2Q19, from +3.1% in the prior quarter. However, this came in stronger that consensus of +1.8%. Consumption expenditures rose +4.3%, strongest since 4Q17, while government expenditures and gross investment soared +5%, fastest since 2Q09. On the flip side, business investment plunged -5.5%, weakest since 4Q15. On the job market, non-farm payrolls gained +224K in June, beating consensus of +165K. Although the unemployment rate edged higher, by +0.1 percentage point, to 3.7%, it stayed at the lowest level in 50 years. Meanwhile, wage growth soared +3.1% y/y, surpassing inflation. Price levels have stayed below Fed’s +2% target. Headline CPI slowed +1.6% y/y in June, from May’s +1.8%. Excluding food and energy prices, core CPI climbed to +2.1% from +2% in May. However, a downtrend appears to have developed over the past few months. PCE deflator is expected to steadied at +1.5% y/y in June, while the core reading could have improved to +1.7% from May’s 1.6%.
On the forward guidance, we expect the Fed reiterate that it “will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion”. We do not expect any change on the reduction of balance sheet. Indeed, the Fed announced in May that it is now on schedule to unwind US$35B per month in May through September. The process will finish at the end of September 2019.