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The Federal Reserve is expected to announce another 25bp cut in the Fed funds rate at its upcoming monetary policy rate meeting, according to the latest research report from DNB Markets.
Furthermore, the guidance is expected to be maintained, indicating that a further rate cut in December is possible. Governor Powell will likely underline that the future path for rates is data-dependent.
A cut is warranted due to the marked decline in both the manufacturing ISM-index and the non-manufacturing index in September. The continuing trade war with China and new tariff hikes on goods from the EU have likely added to trade policy uncertainty recently.
Some data have recently pointed to slower growth ahead in the US economy, but the overall picture is still mixed. Notably, the larger than expected drop in the manufacturing ISM index to a reading well below 50 in September points to a weaker outlook for this sector.
Details showed that the index for export orders fell further from 43.3 to 41.0, pointing to the continued trade war and slower global growth as the main reasons for the weakening. The non-manufacturing ISM-survey also fell in September, indicating that manufacturing weakness has to some extent started to spill over to the service sector.
Investments seem mixed in Q3, with a rebound for residential investments and a further decline for capital formation in the business sector. Employment growth in the US has slowed this year, with the 6-month average down to c150k, while the unemployment rate reached a record low, at 3.5%, in September.
After having fallen short of the 2 percent target last year, core PCE inflation has picked up this autumn. In August, core PCE inflation reached 1.8 percent and is once again fairly close to the target.
"Still, we do not see any imminent inflationary pressures building and the FOMC is likely to be more concerned that inflation will fall back, rather than rise. we believe that the FOMC will not preclude another rate cut at the December meeting, but Powell will, as usual, communicate that the need for more rate cuts will be data-dependent," DNB Markets further commented in the report.
