What Wall Street Banks Say About Fed Rate Cuts This Year
As the July 30-31 meeting nears, here’s the outlook of some of the world’s biggest banks based on recent research reports.
(Bloomberg) -- Federal Reserve Chairman Jerome Powell left it all but certain that the U.S. central bank will reduce interest rates this month for the first time in a decade.
The debate now is how deep they will cut and what will they do afterward. As the July 30-31 meeting nears, here’s the outlook of some of the world’s biggest banks based on recent research reports.
Forecasts range from JPMorgan Chase & Co. and Citigroup predicting a 25 basis point cut to Morgan Stanley forecasting double that amount.
Goldman Sachs Group Inc.
- 25 basis point reduction in July
- 25 basis points of cuts in rest of 2019
Powell offered a somewhat upbeat baseline view of growth, but nonetheless argued that uncertainty “continues to weigh” on the outlook. In our view, this was a strong signal that the trade truce with China and the strong June jobs reports have not derailed the case for a July rate cut. We increased our odds of a rate cut; for the July meeting, we place the subjective odds of a 25 basis point cut at 75%, a 50 basis point cut at 15% and unchanged policy at 10%. Our modal expectation remains a 25 basis point cut at both the July and September meetings.
JPMorgan Chase & Co.
- 25 basis point reduction in July
- 25 basis points of cuts in rest of 2019
It is understandable that Chair Powell remained committed to the storyline supporting action in July. The global backdrop remains concerning, as business sentiment continues to deteriorate and the disinflationary headwinds from slowing producer price index growth will weigh on corporate profits through the current quarter at least. Combined, this is damping global capex growth and feeding back to weakness in global industry. While the case for a 50 basis point cut has been undermined, the case for 25 basis point remains firmly in place and we stick with our call. Whether this is followed by 25 basis point in September will be highly data dependent.
Morgan Stanley
- 50 basis point reduction in July
- No further cuts in rest of 2019
The global economy has lost significant momentum in the past 12 months and trade tensions linger. This is now filtering through more prominently to the U.S. economy. Risks to the outlook remain skewed to the downside. A non-linear impact to growth could materialize if financial conditions tighten, bringing corporate credit risks to the fore. We therefore see a need to act decisively to protect against uncertainty and downside risks. Hence, we continue to expect a quick and front-loaded adjustment, i.e. 50 basis points cut by the Fed in July.
Citigroup Inc.
- 25 basis point reduction in July
- Another 25 basis point cut expected this year, most likely in September
Events and data played out as we had expected – particularly the above-consensus June jobs number and benign G-20 outcome. While in our view this has decreased downside risk, that view is clearly not shared by Chair Powell. We are consequently falling in line with consensus and expect a 25 basis point rate cut in July. A 50 basis point cut is a real possibility, but given that even a 25 basis point cut is likely to provoke two or more dissents, 25 basis points may be the compromise policy outcome. Following the July cut we expect one additional 25 basis point cut, most likely in September.
Bank of America Corp.
- 25 basis point reduction in July
- 50 basis points of cuts in rest of 2019
Fed Chair Powell all but promised that a cut is coming in July. He is unfazed by the recent strong data in the U.S. The challenge is that this may not be a consensus view, making it difficult but not impossible to deliver a 50 basis point cut. For the time being, we should focus nearly as much on key global data as on U.S. indicators.
Barclays Plc
- 25 basis points cut in July
- 50 basis points of cuts in rest of 2019
Chair Powell’s testimony before the House Financial Service committee was surprisingly dovish. (The) congressional testimony increases our confidence in our forecast for at least a 25 basis point cut in the funds rate at the July Federal Open Market Committee meeting, followed by another 50 basis points in cuts by year end.
UBS Group AG
- 50 basis point reduction in July
- No further cuts in rest of 2019
At the June FOMC, Chair Powell was clearly looking to cut rates 50 b.p. at the July meeting. Doing so, in his view, would offset a confidence shock and manage the risks to the outlook. We will receive more data between now and the July 31 policy decision. Those data could mean the chair is not able to sway enough of the committee to a cut. But if Powell remains strongly inclined to cut, the FOMC is likely to show some deference. In light of the strong data, however, a negotiated 25 b.p. cut could be the compromise that emerges.
Deutsche Bank AG
- 25 basis point cut in July
- 50 basis points of cuts in rest of 2019
Chair Powell’s testimony and the minutes to the June FOMC meeting largely confirmed the Fed’s intention to ease monetary policy at their July 31 meeting. While we continue to expect the Fed to cut 75 bps by year end, we remain of the view that the Fed will ease 25 bps in July, and proceed on a meeting-by-meeting basis as they evaluate the incoming growth and inflation data.
To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net;Reade Pickert in Washington at epickert@bloomberg.net
To contact the editors responsible for this story: Stephanie Flanders at flanders@bloomberg.net, Alister Bull
©2019 Bloomberg L.P.