Fed likely to ease rates this week, end quantitative tightening: ANZ Research

The Federal Reserve is expected to ease the federal funds rate by 25 basis points to 2.00–2.25 percent at its monetary policy meeting scheduled for this week, while also putting an end to quantitative tightening, according to the latest report from ANZ Research.

This would take policy slightly accommodative from the lower range of neutral. A rate cut is believed to be justified as uncertainties over global growth/trade are elevated and domestic inflation pressures are weak.

The ANZ Global Lead Index (GLI), which fell sharply in June, captures the extent of the weakness in global manufacturing; it is expected to fall again in July.

In addition, the Fed’s latest Beige Book highlights that worries over global trade have jumped sharply since the last meeting despite the temporary truce reached by Presidents Trump and Xi at the recent G20 meeting. The market is pricing a 20 percent chance of a 50bp cut at this meeting.

In part this view is fostered by commentary from both Williams and Powell who have put forward the idea that when the neutral policy rate is close to the zero lower bound (ZLB) that it is better to take preventative measures than to wait for disaster to unfold.

As Williams recently said, “when the ZLB is nowhere in view, one can afford to move slowly and take a wait and see approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB”, the report added.

"We also believe the Fed will keep its easing bias in its statement as uncertainty remains elevated and inflation pressures weak. We will look to Powell’s press conference for guidance on the likely timing of the next move and beyond. At this juncture, the Fed’s dot plot in June suggests that this “easing cycle” will be relatively modest and short lived," ANZ Research commented in the report.