Watching and waiting: Fed in neutral

  • 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.