Snapshot - Strategy & economics

Fed hits pause, for now

Trade uncertainty and a squeeze on profit margins could see a return to rate cuts in 2020.

31/10/2019

Keith Wade

Keith Wade

Chief Economist & Strategist

Schroders

The US Federal Reserve (Fed) has cut rates by 25 basis points to take the target for the federal funds rate to 1.50%–1.75%. But in his press conference, Fed chair Jerome Powell indicated that the bar to further easing had been raised and would require a “material reassessment” of the economic outlook.

In effect, the Fed believes it has now taken out the necessary insurance to cover the risk of a more serious downturn in the US economy. 

Q3 growth subdued amid trade tensions

This came as an early Halloween surprise to markets who were looking for a more dovish message (i.e. indications of more easing to come), particularly on the back of the subdued GDP report released earlier in the day. The US economy expanded at a 1.9% annual rate in the third quarter with business capital spending and the trade sector dragging on activity.

Uncertainty from the trade tensions between the US and China is clearly taking a toll on the economy as exports slow and firms put their spending plans on hold. The consumer, however, continues to spend with household consumption rising 2.9% during the period.

Fed optimistic on trade deal but uncertainty remains

For the Fed to remain on hold we would need to see the drag from the trade wars ease. Powell sounded optimistic on this front with the US close to a phase one deal between the US and China. Recent developments suggest that we will see President Trump and President Xi sign off a deal in November, although the venue will have to change now that Chile is not hosting the APEC (Asia-Pacific Economic Cooperation) summit.

Whether that is enough to lift business confidence remains to be seen as unless you are a US soybean farmer or pork producer little will have changed. The danger is that capital expenditure and trade remain weak and that the slowdown spreads more significantly into employment and consumption. The Fed will be hoping that its easing measures so far will be enough to cushion households against this outcome.

Our view is that there will still be considerable uncertainty and with a squeeze on profit margins we will see more lay-offs and the Fed returning to rate cuts in 2020.

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