AMP Capital chief economist Shane Oliver says this isn’t the first time US central bank has cut rates despite a growing economy.
As widely expected, the Fed cut rates by another 0.25 per cent taking it to a range of 1.75 per cent to 2 per cent, for the second cut this year.
Mr Oliver said that while the Fed remains optimistic on the outlook for the US economy and made no significant changes to its economic forecasts, as with the July cut it’s basically taking out insurance given ongoing threats to the US outlook from the trade war and slower global growth at the same time that inflation is still running just below target.
“The current easing cycle remains a bit like the Fed easings of 1987 after the share market crash and in 1998 after the LTCM hedge fund crisis – that saw the Fed cut despite solid growth in order take out insurance in case there was a negative flow-on to the economy,” he said.
AMP Capital predicts that another 25 basis point easing is likely, either in October or December. Mr Oliver said the risks to the growth outlook, particularly on trade, won’t go away quickly and that the Fed appears to have taken the decision that it’s easier to control a rise in inflation than a further slide or deflation.
“Fed Chair [Jerome] Powell did not seem too concerned about liquidity stresses in the US money market (which look related to corporate tax payments, higher budget deficits and the impact of quantitative tightening) but he did indicate that the Fed may need to resume allowing its balance sheet to grow with the economy,” Mr Oliver said.
“This is not quite QE and it’s much smaller but it would ease liquidity stresses. In the meantime, the New York Fed is continuing to address the issue by injecting funds into the money market (via repurchase operations).”
Nikko Asset Management chief global strategist John Vail noted that markets remained relatively stable after the Fed’s announcement, indicating that its guidance to the markets was successful and that the markets broadly agree with the result given the conflicting macro data, the trade war and the other major geopolitical uncertainties extant, with equities tending to look on the bright side and bonds looking on the dark side.
“There were tweaks to the statement, the projections of macro-economic data and the dots, but nothing very significant in sum, with some tweaks being dovish and some more hawkish,” Mr Vail said.
“Just like the rest of the world, the Fed is waiting for key political issues to be resolved before making major commitments.”
Like AMP Capital, Nikko Asset Management expects another 25 basis points cut in the fourth quarter. However, Mr Vail says beyond that the outlook is dependent on “data and politics”.
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