Yesterday’s FOMC statement and Fed Chair Powell’s press conference may have satisfied those looking for US rate cuts later in 2019. However, we see in both the statement and the press conference an uncharacteristic reluctance to react pre-emptively. This is despite a lowering of the central projection for inflation by 0.3% to a below-target 1.5% for 2019. It would have been relatively straightforward in our view to have argued for a cut now.

During the press conference, Fed Chair Powell consistently highlighted the need to respond to actual data rather than mere changes in sentiment, which could prove transient. Notably, he also linked the state of trade negotiations between the US and China as driving sentiment. It may frustrate the current US administration that by implication the Fed may not wish for the golden stock market scenario of sharp cuts in rates quickly followed by an agreement on US/China trade, just in time for the 2020 US Presidential election.

The weakness in the actual data was described as a very recent phenomenon, with all but one of the voting members of the FOMC Governors opting to wait rather than cutting rates. Powell indicated that FOMC policymakers as a whole wanted to have confirmation of how much the economic risks would weigh on the actual outlook, before taking action.

Challenged on the academic research which indicated that central banks should act quickly and decisively when faced with the prospect of a downturn with rates close to the zero lower bound, Powell chose to re-emphasize the recent nature of negative events (a likely reference to the breakdown in US/China trade negotiations) and instead suggested that the risks of waiting too long were not at this point prominent.

Given the high expectations for this FOMC meeting, where an early cut to rates was an outside possibility, the tone of the FOMC statement which emphasized rising risks and uncertainty rather than any actual change to the outlook, was on balance less accommodating than we would have expected in the circumstances.

We believe survey data for the more cyclical manufacturing sector on a US and global basis might have been sufficient reason to cut rates now, given the rapid decline in the outlook for US inflation acknowledged by the FOMC. Instead of the relatively benign US equity market reaction which was effectively unchanged following the statement, we would look to the US bond market where yields fell sharply at the 10 and 30-year maturities overnight, indicating that fixed-income investors believe the Fed may have to cut rates deeper and for longer by not taking action now.