Will split Fed lead to another 25 bps cut?

The Bank of Canada has held firm but 'Fedspeak' and search for consensus suggests a decrease this month

Will split Fed lead to another 25 bps cut?

Division at the Federal Reserve is likely to lead to a “consensus” 25 basis points interest rate reduction this month, according to WisdomTree’s head of fixed income strategy.

Kevin Flanagan is mindful that the results of the next FOMC meeting are due on September 18 and will include the full house: a policy statement, a summary of economic/rate projections and a press conference.

He said that based on the “Fedspeak” surrounding chairman Jerome Powell’s speech at the Kansas City Fed’s annual Jackson Hole conference, the policymakers appear to be split into two camps – one that leans towards another cut (with some wanting a 50 bps decrease) and others feeling that no more cuts are required just yet.

“Typically, the Fed likes to build a consensus,” said Flanagan, “so it would seem the reasonable expectation at this juncture is for another 25 bps reduction. In the interim, the Fed along with the money and bond markets will be receiving some fresh economic data, starting with last week’s jobs, upcoming retail sales and inflation numbers, to name a few things.”

The best laid plans by the Fed have not worked out as Powell expected – and the reactionary nature of its policy direction has continued into the summer months after the jolt of the market’s reaction to the December rate hike and Fed forecasts of additional hikes this year.

Flanagan believes the next phase of the Fed story will be increasingly about tariffs. The escalating trade war with China is showing little sign of easing off and when the news hit that President Donald Trump would likely be imposing increased tariffs, the market began aggressively expecting additional cuts later this year and into 2020.

It all makes Powell look like he’s being backed into a corner as his words quickly get overtaken by geopolitical developments.

Flanagan said: “The most recent bout occurred following Powell’s August 23 speech at the Kansas City Fed’s annual Jackson Hole conference. The Fed chair reiterated the stance that policy makers would ‘act as appropriate to sustain the expansion’, and the market reaction was basically underwhelming.

“By the way, the Fed typically likes that type of a reaction, unless it is trying to send a policy message. However, another round of negative trade headlines ‘hit the tape’ and the money and bond markets ‘forgot’ Powell’s widely anticipated speech rather quickly.”