Fed to cut policy rate in Sept, Wall St predicts

Amid flashing red lights from the World Bank, IMF and OECD, and recent downbeat data on job growth in the United States, Wall Street experts expect the US Federal Reserve to cut its policy rate from September, according to a new report.

With the prolonged and intensified US-China trade war casting widespread gloom over the global economy, international institutions are taking a knife to their annual outlooks. Germany and Italy have revised down their growth forecasts for the year and May’s US non-farm payroll numbers increased much less than had been widely predicted by most economists – although, Asia Times was on target.

The US Department of Labor announced last week that the US economy added 75,000 non-farm payrolls in May, less than half of consensus market estimates of 180,000. Raising further concerns, April’s job reading was revised down to 224,000 from 263,000, and March’s figure was also lowered to 153,000 from 189,000.

However, not all US macros are sub-par. The unemployment rate remained steady at 3.6% – a 50-year low – with hourly income rising 3.1%.

In regard to trade disputes, Federal Reserve Chairman Jerome Powell said last week: “We are closely monitoring the implications of these developments for the US economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.”

The market interpreted his remarks as leaving open the possibility of a rate cut.

Wall Street speaks

In a report published on Monday, the Korea Center for International Finance wrote that a combination of factors “should put more pressure on the Fed to consider lowering rates.” According to the report, written after its New York office interviewed  Wall Street economists, the US central bank is expected to cut the Fed Funds Rate from September after a period of monitoring.

“The May jobs report sends another indication that the pace of economic growth appears to be stepping down,” Michael Feroli, an economist at JPMorgan, told the KCIF. “While one should always respect the month-to-month volatility of the data, the trend in job growth has clearly downshifted. Moreover, the weakness in job growth was broadly experienced across industry groups and not obviously driven by distortions such as weather or strikes.

“Growth is slowing, trade risks are rising, and inflation threats are absent,” Feroli continued. “Even so, we think the most likely outcome of that debate is to adopt a watchful waiting posture. We still look for cuts in September and December, though risks are skewing toward sooner and more.”

Dick Rippe, an economist at Evercore-ISI, said his institute forecasts the Fed will cut its policy rate three times – in September, December and March. “Just about everything in the employment data was weaker than expected,” he told KCIF. “We’ve lowered our US 4Q-to-4Q 2019 forecast to 2%.”

Rippe added: “The probabilities favor the Fed doing something. Low and slowing inflation makes this possible. Normally at this stage of the cycle, the Fed would be on the horns of a dilemma with the economy slowing and inflation rising, but that’s not the case now.”

David Wessel, a director of Hutchins Center on Fiscal & Monetary Policy at Brookings, said that the US economy was still strong, as seen in the low unemployment rate, and despite rising fears that the economy was getting worse, the Fed was likely to take its time in cutting interest rates.

“I don’t think they’ll cut interest rates in a couple of weeks,” he said, according to the report. “July is the soonest it would come.”

World Bank, IMF, OECD pessimistic

Meanwhile, global institutions are offering downbeat assessments.

Last week, the World Bank revised down its forecast for this year’s world economic growth rate to 2.6% from 2.9% predicted in January. In March, the IMF revised its world growth forecast for the year down to 3.3% from its estimate of 3.5% in January. The OECD also cut its global economic growth forecast for this year by 0.1%p to 3.2%. The main culprit was shrinking global trade volume due to the trade war.

And there is more.

According to the KCIF, Germany’s central bank last week revised down its growth forecast for this year by 1.0% from its previous estimate to 0.6%, in consideration of weak exports and industrial activity. Italy’s central bank also cut its growth forecast for this year to 0.6%, which is 0.3% lower than the previous estimate, due to sluggish exports stemming from falling external demand.

Adding to Europe’s woes, the UK was warned by the European Bank for Reconstruction Development (EBRD) that it could fall into recession if Brexit takes place without a deal.