The minutes of the July 30-31 Federal Open Market Committee (when the Fed lowered short-term interest rates by 25 basis points) showed that officials were split. “A couple” preferred a 50 basis point cut, while “several” favored no change. “Most” viewed the 25 basis point rate cut as “a recalibration of the stance of policy” or “a mid-cycle adjustment.” Contrary to financial market expectations, there was no presumption that further rate cuts would be needed.
In his Jackson Hole speech, Fed Chair Powell said that the Fed has been monitoring “three factors that are weighing on this favorable outlook: slowing global growth, trade policy uncertainty and muted inflation.” He noted that “the three weeks since our July meeting have been eventful.” Another round of tariffs has been announced, there is “further evidence of a global slowdown,” and geopolitical events (Brexit, Hong Kong, Italy) “have been much in the news.” Based on the Fed’s assessment of the implications of these developments, the Fed “will act as appropriate to sustain the expansion.” That suggests a strong likelihood that the Fed will cut rates again at the September 17-18 FOMC meeting (already factored into the markets).
Meanwhile, China announced retaliatory tariffs against U.S. exports.
Next week, the economic data calendar picks up, but investors are expected to be more focused on trade policy developments and the global economic outlook. The estimate of 2Q19 GDP growth is expected to be revised slightly lower than in the advance reading (+2.1%). Durable goods orders, advance economic indicators and personal spending data will help to fill in the picture for early 3Q19.
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