The US Federal Reserve continued its dovish tilt on Wednesday, indicating interest rates are likely to remain unchanged through 2019 and stay within a target range of 2.25%-2.5%.
The Federal Open Market Committee’s “dot plot” – policymakers’ projections of future interest rates – suggests rate will remain through 2019 before one more hike in 2020. The median projection of US interest rates at the end of this year came in at 2.4%, from 2.9% previously.
The Fed also announced it would halt its balance sheet run-down, or quantitative tightening (QT) programme, in September, at which point it would have fallen to $3.6 trillion, from $4.3 trillion when QT begun.
Elsewhere, the Fed noted that recent indicators point to slower growth of household spending and business fixed investment in the first quarter. Chair Jerome Powell did, though, point to a positive outlook for the rest of the year, with unemployment under 4% and inflation below target.
Still, estimates for GDP growth for both 2019 and 2020 were downgrades slightly, to 2.1% (from 2.3%) and 1.9% (from 2.0%) respectively. While financial conditions have eased in recent months, Powell added, they are still “less supportive to growth” than last year.
Futures markets are now in agreement with the FOMC, pricing in zero rate rises in 2019 and one in 2020. However, experts tend to disagree.
What Do The Experts Say?
Research firm Capital Economics is one of many that thinks the Fed’s next move will be to cut rates in early 2020. In fact, it expects rates to be 75 basis points lower than they are today at the mid-way point of next year.
“The Fed’s projections imply that, following what looks set to be a fairly sharp slowdown in the first quarter, economic growth will rebound over the rest of the year. We are far less optimistic,” says senior US economist Michael Pearce.
“With the boost from fiscal stimulus already faded and the lagged impact of higher interest rates still feeding through, we expect economic growth to remain below its 2% potential pace this year. That’s why we think the Fed’s next move will be to cut rates.”
Nick Maroutsos, co-head of global bonds at Janus Henderson, agrees that the Fed’s next move will be to cut rates and expects other central banks to follow their US counterparts’ dovish rhetoric.
“The global environment is fraught with heightened geopolitical risk and threats to economic growth, including but not limited to US-China trade tensions, European political challenges and Brexit negotiations,” he explains.
Ariel Bezalel, manager of the Morningstar Silver-rated Jupiter Strategic Bond fund, meanwhile, thinks a cut is on the way before 2019 is out. He thinks China is currently the “marginal driver of [economic] growth in the world". With data out of China weakening currently, Bezalel sees global growth continuing to disappoint.
“I think the Fed is going to go on hold for an extended period of time and if we look in post-war history every time the Fed have gone into a pause phase it’s typically been led by a cut,” he predicts.
Others are more constructive. Anna Stupnytska, global economist at Fidelity International, thinks the Fed’s dovish pivot “may soon come back to bite them”. Indeed, she adds, should economic data surprise on the upside as the year unfolds, its current stance will leave it with little room to manoeuvre.
“The combination of easier financial conditions, continued tightening in the labour markets and some improvement in growth and inflation later in the year might necessitate another policy pivot, putting the Fed back onto the policy normalisation trajectory,” she continues.
Overall, should the Fed hit current expectations, Rick Rieder, chief investment officer of global fixed income at BlackRock, thinks it would be fully justified “The US economy is today witnessing the most stable growth and inflation dynamics in its history,” he explains.
“Its remarkable resilience and its ability to maintain its shape is a function of a more modern, more service and consumption-oriented economy, and hence one that requires much less monetary policy tweaking and adjustment than before.”
