FOMC likely to cut target rates by 25bp at the October meeting, third successive easing: ANZ Research

The Federal Reserve is expected to cut its target rates by 25bp at the October meeting, which would be its the third successive rate cut. This would take policy slightly more accommodative. The move seems justified in light of the data pulse since the September 17–18 meeting, according to the latest report from ANZ research.

Global manufacturing continues to expand at a pace well below trend as evidenced by the ANZ Global Lead Index which remained very week in September. Uncertainty over global trade remains a significant headwind to global manufacturing despite a temporary US-China truce.

The Fed’s Beige Book highlights that worries over global trade policy uncertainty remain elevated, albeit they have eased slightly. These headwinds are taking their toll on US industrial activity with the ISM manufacturing sinking to its lowest level in more than a decade in September.

They also appear to be spilling over into domestic focused sectors now, with the non-manufacturing sector ISM easing to its lowest in three years. Inflation expectations (market and household) have eased further and are at the low end of long-run averages.

Household survey-based indicators – both the New-York Fed consumer survey and the University of Michigan – are currently at all-time lows. This development is likely troubling for a number of FOMC officials given that growth is slowing and inflation remains below the 2 percent target.

The market is, as of October 25, assigning a 90 percent probability for a 25bp cut at this week’s meeting. This pricing has been elevated for some time and there has been no push back from Fed officials. As a consequence, it would be highly unlikely for the Fed not to deliver, the report added.

"We expect that FOMC members Rosengren and George to dissent from the rate cut again, but we don’t expect Bullard to be voting for a more significant easing," ANZ Research further commented in the report.