Snapshot - Economics

Watching and waiting: Fed in neutral

The Fed’s next move is likely to be a rate cut, but not until next year

2 May 2019

Keith Wade

Keith Wade

Chief Economist & Strategist

  • The US central bank has left interest rates unchanged, given below-target inflation
  • Schroders expects the next move to be a cut in 2020 as the economy slows but the risks are tilted towards an earlier move

Although there had been talk of an interest rate cut, the US Federal Reserve (Fed) left policy unchanged at its May meeting with the target benchmark rate at 2.25% to 2.5%. Fed chair Jerome Powell said that the policy stance was “appropriate right now – and we don’t see a strong case for moving in either direction”.

The policy setting Federal Open Market Committee noted that inflation had declined and that the underlying rate was running below its 2% target. However, chair Powell struck a more hawkish tone in his press conference when he said that inflation weakness is expected to be “transient or idiosyncratic”. This impacted markets, sending the dollar and the two-year bond yield higher, and no doubt raised the ire of President Trump who has been pushing Powell and the Fed to cut rates and restart quantitative easing.

We do see a cut as being the next move from the Fed but not until next year when the economy has slowed. The risks though are tilted toward an earlier move given that some of the recent strength in activity will prove temporary, having been boosted by inventory building which will reverse in coming months.  

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.