FOMC: Cuts now likely but not certain – Standard Chartered

In view of Sonia Meskin, US Economist at Standard Chartered, the US Fed’s goal is to sustain the current economic expansion, and its key dilemma is that it has a limited set of tools to do so.

Key Quotes

“The Fed policy toolkit is currently set up to deal with a small or moderate shock to growth but not a severe one. This strengthens the case for pre-emptive cuts.”

“Our baseline scenario does not build in an all-out trade war. Nonetheless, the threat of further tariffs is likely to affect business sentiment and decision-making, and Fed policy makers have flagged concerns over the impact of trade tensions on broader economic conditions.”

“We believe the following would be required for the Fed to refrain from a series of cuts to the federal funds target range (FFTR) this year: (1) no further tariffs on imports from China and no tariffs on Mexico or the EU; (2) no palpable deterioration in employment and confidence indicators and (3) no significant tightening in financial conditions.”

“These conditions seemed easier to fulfil a few months ago than they do now. They are not entirely independent, but they could occur separately. The Fed has expressed its willingness to act if there is tangible downside risk. From its perspective, such risks have not yet emerged, but the probability of one or more of them has risen. If data and financial conditions do not deteriorate from here, but trade threats remain heightened, the Fed could limit itself to one or two pre-emptive cuts akin to the Bank of England’s (BoE’s) 2016 ‘insurance’ cut in the wake of the Brexit vote.