Powell cited three reasons for the initial cut: higher trade uncertainty, slower global growth and inflation remaining below 2%. However, since the meeting, the U.S.-China trade war has escalated and market sentiment has shown further jitters. Despite Powell’s comments, Danske Bank analysts led by Mikael Olai Milhoj now believe the Fed will quickly move with 25 basis-point cuts at each of its next five meetings — taking the target range at the March meeting to 0.75-1.00%.
“Economic indicators outside the U.S. have been weak, with weaker-than-expected Chinese data for fixed asset investments, industrial production and retail sales, German GDP contraction in Q2 (the second quarter) and a very downbeat ZEW survey, ” the note published on Tuesday said. “While actual U.S. CPI inflation has surprised to the upside in recent months, market-based inflation expectations are low (1.6% versus 1.7% when the Fed started its U-turn) and it is difficult to see any reasons why inflation should accelerate out of control any time soon.”
The analysts anticipate that despite the aggressive call, the Fed will not pre-commit to further easing, instead retaining its current ad hoc approach. The note suggested that a sudden large cut of 50 basis points seemed excessive, since historically, larger cuts and cuts between meetings have occurred during existing recessions and rising unemployment.