Fed's Powell signals mini-cut cycle - ABN AMRO

Bill Diviney, the senior economist at ABN AMRO, notes that the FOMC cut the target range for the fed funds rate by 25bp to 2.00-2.25%, as widely expected.

• “Fed Chair Powell made a robust case for the move in his press conference, citing three key motivations: to insure against downside risks from trade tensions and the global manufacturing slowdown, to offset the effects those factors are already having on activity in the US (specifically the manufacturing sector), and finally, to bring inflation back to target.
• In addition to these, Powell also noted the decline in neutral rate estimates of FOMC members, which suggested the current policy stance was less accommodative than previously thought, as well as the decline in NAIRU estimates, which suggests more room for the labour market to expand without significant inflationary pressure.
• However, Powell also sought to manage expectations for further aggressive rate cuts. When questioned on whether one 25bp cut would be enough, he emphasized the path the FOMC has been on since the beginning of the year, moving from a hiking bias, to a neutral stance, and then to an easing bias – and how this by itself had provided significant stimulus by easing financial conditions.
• Powell failed to "out-dove" market expectations for rate cuts, with equity markets declining, the dollar rising, and OIS pricing of rate cuts receding c.7bp (with 58bp of cuts still priced by next year).
• All told, the outcome supports our view that the Fed will deliver an additional two 25bp cuts by Q1 2020.