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The Federal Reserve is expected to adopt only one rate cut in 3 to 6 months ahead; the timing of the cut is difficult but, as the Fed wants to see how things play out, the March meeting is probably the earliest possibility, according to the latest research report from Danske Bank.
Most FOMC members (including the doves) have said they think the current policy stance is appropriate and that it would take a further deterioration of data to make further cuts.
It is still believed that the US economy is more fragile than the Fed believes and that the renewed trade optimism is unlikely to be enough to trigger a rebound in business investments just yet.
Most soft indicators on investment intentions signal a further decline in business investments. There is a need for a more permanent deal for investments to kick off again (a 50 percent probability of this happening can be assigned). The world economy also looks fragile, in particular in Europe, despite the early signs of stabilisation in China, the report added.
If hard data begin to move lower as suggested by soft indicators, or a setback is received in the US-China trade negotiations, the Fed may soon cut rates again (if the opposite is true, the Fed is likely to remain on hold; a hike still seems unlikely in this scenario, as Fed Chair Jerome Powell said a hike is not on the cards until inflation starts moving persistently above 2 percent).
In addition, monetary policy is not as expansive as one may think, as the cuts have taken the Fed funds rate only down to neutral. Without more easing, it also increases the probability the Fed will need to cut all the way down to zero percent, as a response to a recession.
"Following the dovish policy signal sent by Bank of England last week, we now expect it to deliver a 25bp cut at its next 'big' meeting in January 2020, taking the Bank Rate to 0.50 percent. This forecast does not depend on the election outcome, although we believe a cut would be more likely in the event of a hung parliament," Danske Bank further commented in the report.
