Chief economist update: Future path of fed funds rate

Two down, none to go!

There was division at the Fed - one official wanted a 50 bps rate cut; two wanted the target rate maintained - but after all was said and done, they were outvoted by the majority of seven (led by Fed chair Powell) which didn't disappoint financial market expectations by cutting the fed funds rate another 25 basis points to 1.75%-2% at the conclusion of the September FOMC meeting.

There was little movement in the US financial markets for as Financial Standard declared just three days ago: "Every man and his dog is already positioned for this eventuality."

US equity markets closed mixed: Dow +0.13%, S&P 500 +0.03%, Nasdaq -0.11%, Russell 2000 -0.63%; the yield on 10-year US Treasuries was unchanged at 1.8%; and the Bloomberg US dollar spot index ticked up by a mere 0.2%.

Yes Virginia, there's nothing to write home to mother about. They're all within the normal day-to-day ups and downs of the markets.

This is because the future path of the fed funds rate remains uncertain, even over the remaining months of 2019.

While the Fed consensus is that the September cut is the last, the dot plot shows that five FOMC participants think rates should be lifted by 25 bps by the end of this year; five think rates will remain at 1.875%; and seven think another 25 bps reduction, to 1.625%, would be appropriate - and stay there through to the end of 2020 (whatever "there" would be).

This divide in participants' assessments of appropriate monetary policy comes amid very little change in the Fed's economic projections. While 2019 GDP growth was revised a tad higher to 2.2% (from 2.1% in the June projections), the Fed still sees the economy growing at 2.0% in 2020.

The unemployment rate is predicted to be at 3.7% (from 3.6% forecast in June) this year and the next. PCE price inflation forecasts were untouched at 1.5% and 1.9% in 2019 and 2020, respectively.

These were, more or less, the same numbers that the Reuters' poll (pre-September FOMC announcement) of 120 economists responded to, that revealed that majority of the respondents think the Fed will cut rates to 1.75%-2% in September and then by another 25 basis points to 1.50%-1.75% at its December 2019 FOMC meeting and keep them there through to the end of 2020.

That's one more rate cut this year. Two more if you ask Bank of America Merrill Lynch which expects 25 bps cuts at the October and December FOMC meeting.

At the end of the day and to quote Jerome: "If the economy does turn down, then a more extensive sequence of rate cuts could be appropriate. We are going to be highly data-dependent ... We are not on a pre-set course."

And this, ladies and gents, are all reliant on Trump and his war on trade. With one stroke of his pen or a flip of his toupee, he could up the ante on tariffs, ensuring he gets the zero (even negative) interest rates - plus QE - he's been bugging Powell to implement.

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