Wed, Jun 23, 2021 @ 02:20 GMT
HomeContributorsFundamental AnalysisFOMC to Cut to 1.375% by December 2019 as Trade War Escalates

FOMC to Cut to 1.375% by December 2019 as Trade War Escalates

President Trump’s tariff decision has crystalised the downside risks for the US. FOMC to respond with follow-up cuts in September, October and December.

At its July meeting, the FOMC cut the federal funds rate by 25bps. This was billed by the Committee as the beginning of a “mid-cycle adjustment” of policy “not the start of a long series of cuts”.

Just a day later however, President Trump’s decision to impose a new 10% tariff on the $300bn of Chinese imports to the US which had previously been unaffected by the trade war has cast considerable doubt on this view. Furthermore, President Trump has made it clear that the tariff rate could increase to 25% or more.

President Trump’s decision has two key implications: the $300bn of goods so far unaffected are essentially direct consumer goods, indicating an unexpected negative shock to household budgets. Secondly, the development significantly raises the intensity of the trade war with negative implications for world growth, global manufacturing and business investment (including in the US).

These developments will make significant changes to the FOMC’s assessment of the outlook and associated risks, particularly given US growth was already slowing.

Previously we had sided with the FOMC, anticipating that two cuts (including July) would be enough to sustain GDP growth at trend in 2019 and 2020. Now however, with a lower expected profile for US investment, employment, confidence and therefore consumption, we believe the FOMC will want to be more pre-emptive than implied by just a “mid-cycle adjustment”. Instead, the best policy approach in these circumstances is to use some of their existing policy flexibility to ‘get ahead of the curve’.

That outlook implies that the FOMC is likely to cut at every meeting through to the end of 2019, in September, October and December, taking the fed funds rate to 1.375%.

Westpac Banking Corporation
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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