Overview
The Federal Reserve, which is wrapping up its two-day meeting today, is widely expected to cut rates again for the third consecutive time since July. But the key question is whether the US central bank will maintain its dovish stance for the rest of the year.
A global slowdown exacerbated by trade wars and weaker business activity and investment is expected to force the Fed’s hand. The markets certainly seem to think so, with expectations of a 25-basis point rate cut almost fully priced in.
The Fed switched rapidly from hiking to easing mode after the market reaction to its December rate rise in 2018. Having first cut rates in the summer, for the first time since the global financial crisis in 2008, it cut rates again in September.
Worries of a slowdown in economic growth have also been reflected in the 10-year US treasury yield which has fallen in line with manufacturing data from the Institute for Supply Management (ISM). This data fell to its lowest in a decade - at 47.8 per cent in September. If manufacturing data continues to weaken, yields are expected to fall further as investors rush to the safety of Treasuries, encouraging the Fed to cut further to prevent a recession. If, however, there is a resolution in the US-China trade talks, business confidence is expected to pick up, giving the Fed some headroom to pause further rate cuts.
More than half of global central banks are in easing mode, the biggest proportion since the financial crisis. To stimulate growth, the European Central Bank has responded with an aggressive set of monetary policies - cutting its deposit rate further into negative territory and restarting quantitative easing.
Meanwhile, the Bank of England, which has so far bucked the central bank easing trend, may have to cut rates at some point in the coming months given that growth has been weaker than other G7 economies and that the Brexit outcome is still uncertain.
