Market Update: Two cuts and done?

The Federal Reserve cut interest rates by the expected 25bplast night to a range of 1.75%-2%. This was its second consecutive reduction in rates, but the central bank signalled that it could stop there despite uncertainty over trade and strong pressure from ‘you-know-who’ in the White House for more accommodation. 

The accompanying press release was little changed from July’s, but the Fed’s projections showed a more hawkish line that many had expected. Their median forecast indicates they don’t expect to cut rates again this year or next with the policy rate moving 25bp higher in 2021. However, the marketdisagrees somewhat as it continues to price nearly 70bp of Fed funds rate cuts from today’s level.

The new forecasts showed a small uptick in growth while inflation was left unchanged with both headline and core PCE at 2% in 2021. There was no acknowledgement of the recent pick-up in core CPI or wages, both of which are running at their fastest pace since the GFC. 

In truth, there wasn’t too much to get excited about with the S&P ending the day up 0.1% after declining slightly during the post-meeting press conference. Other than reaffirming the committee’s concern over global growth, trade uncertainty and domestic inflation, Chair Powell did not signal any deviation from the current course of action. That said, thedesire to not unnecessarily leave ‘dry powder’ in the face of growing risks potentially supports additional fine tuning this year. Ultimately, trade policy and monetary policy remain deeply entangled.

Today we have numerous other central bank meetings including The Norges Bank rate decision. This could be one of the most exciting rate-setting meetings for some time as in contrast to every other major central bank, we saw a clear signalling of higher rates at their previous meeting. Even as global risks and a slowdown have been increasing, the Norwegian economy continues to rattle along with growth still above trend, strong wage growth and a tightening labour market. Most Norges Bank observers also believe they will signal a slight probability for a rate hike during the remaining forecast period. 

The Bank of England rate decision is released at midday today and there will be no news conference or inflation report. Markets are fully expecting rates to be kept on hold at 0.75%, which is somewhat at odds with the recent dovish pivot by other major central banks and the dismal growth outlook. 

The bank is essentially adopting a ‘wait-and-see’ approach both to the ‘B’ word and the hawkish signals coming from increasing wage pressures, which are running close to post-crisis highs. The expected boost from stockpiling ahead of the Brexit October 31 deadline may also confuse the economic picture. 

Of course, since the last BoE meeting, the risk of a ‘no deal’ has undoubtedly fallen with the passing of a Parliamentary bill to force an Article 50 extension should the government fail to get a deal approved by lawmakers. This has shifted rate expectations as they no longer indicate a rate cut within the next 12 months, in fact no move in rates is seen for the next three years or so.