The FOMC minutes for the July meeting explained that the key reasons for the rate cut are slowdown in global economic outlook and subdued US inflation. An insurance reduction was needed to prevent these factors from dragging US economy. Yet, the decision to lower the Fed funds rate, by -25 bps, to 2-2.25% was not unanimous. While some members favored a more aggressive reduction, some preferred to stand on the sideline.

The members were concerned that “pronounced slowing in economic growth in overseas economies” would cause a slowdown in US manufacturing activities and business investment. Concerns for weak inflation were aligned. Despite the low unemployment rate, limited wage growth has dragged household spending. As noted in the minutes, statistics over the past several years suggested that “inflation had tended to run modestly below the Committee’s longer-run goal of +2%”, while “some indicators of longer-run inflation expectations currently stood at low levels”.

The Fed regarded the rate cut as a “prudent step from a risk-management perspective”. This suggests that the July move has not indicated the beginning of a rate cut cycle. Indeed, the Fed noted at the policy statement that it was a “mid-cycle adjustment”. The members agreed that future decision would be data- dependent and would avoid “any appearance of following a preset course”.

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Economic developments since the July meeting have not improved. US inflation improved in July, but only slightly. Headline CPI climbed higher to +1.8% y/y, compared with consensus of +1.7% and June’s +1.6%. Core inflation picked up to +2.2%, from +2.1% in June. Meanwhile, it appears less likely that US- China trade war could be resolved anytime soon. Risks to global and US economic outlook remain skewed to downside. The focus of the week is Fed chair Jerome Powell’s speech at Jackson Hole symposium on Friday. It would be his first public speech after the July meeting. We expect that he would give some indications about the Fed’s monetary policy stance. All in all, we expect the Fed to cut its policy rate by another -25 bps in coming months.

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