Growth and inflation to justify further FOMC easing from mid-year – Westpac
Following the US Federal Reserve’s January month monetary policy meeting, Westpac came out with its research expecting the key US catalysts to justify another sequence of three rate cuts by the middle of 2020.
As expected, the FOMC began 2020 as they ended 2019, remaining constructive on the outlook, particularly the US labour market and the support it is providing to household spending.
This can be seen in the decision statement where the labor market was again characterized as ‘strong’. Job gains were viewed as ‘solid’ and the unemployment rate has ‘remained low’.
Notably, there was no discussion of the recent deceleration in wage growth, nor the loss of support for household disposable income from investment income through the second half of 2020.
With this economic cycle now having run for over a decade and given the Committee’s belief that more economic progress can be won, such an outcome would surely lead to “a material reassessment” of the FOMC’s outlook and a consequent easing in the stance of US monetary policy.
Our base expectation for the US economy is that the first half of 2020 will see GDP growth fall below trend and core inflation holds below the 2.0%yr target. Come June then, the FOMC will be justified in beginning another sequence of three rate cuts.
Following June, September and December is the most likely timing for the second and third cuts. This would see the federal funds rate ending 2020 at a mid-point of 0.875% – a policy stance we believe will stabilize GDP growth at trend come 2021.