The Fed is getting in front of an issue that many of us have talked about since spring, and that that is a US and global economic slowdown. China and the US have seen their economies slow this year, but the more recent intensity of the trade war is causing damage and some analysts feel that a more pronounced slowdown is possible. So today the central bank announced that it is taking down the overnight lending rate to a target range of 1.75% to 2.0%, as five members of the FOMC approved of the 25 basis point cut but are in favor of keeping rates stable through the rest of the year, and seven favored at least one more cut by December.
According to an article on CNBC attributed to Jeff Cox, the committee stated, “the implications of global developments for the economic outlook as well as muted inflation pressures” as the primary rationale for this Fed action. Recession fears have risen during the summer amid heightened US-China trade tensions, weakening data particularly in the manufacturing sector, and a progressively rockier global economy. The committee projects GDP growth at 2.2% which is up from the 2.1% estimate in June, though the longer-run expectations remain at 1.9%. Keep in mind that the Fed Chief, Powell stressed that the US economy was solid and it was expected to expand at a moderate rate.
The trade war will continue as the powers in Beijing will work to disrupt Trump and his re-election. Getting Trump out of office in the hope of an easier trade policy is that China is wishing for.
We feel that despite consumers showing strength, the US economy will slow down in Q4 and rate cuts, like the one we saw today will have little impact in 2020. However, a GDP expansion level of 1.5% to 2.0% is likely for 2020 and with the robust labor market, the economy will continue to move along, albeit at a slower pace.