Blog The Fed’s Rate Cut: Growth ‘Insurance’ We find the Fed’s statement clear, and we expect another rate cut as soon as September with possible additional cuts thereafter.
The Federal Reserve’s decision on 31 July to lower the target range for the federal funds rate by 25 basis points (bps) to 2.0%–2.25% marks the first policy rate cut in more than a decade. It had been well telegraphed, and was widely expected by us and by markets. Also as expected, the FOMC members’ rate projections in June, about half the committee thought no rate cuts would be needed this year, while others were forecasting 50 bps in cuts. The Fed’s final decision to cut by 25 bps was most likely a compromise, but we suspect that economic developments between now and September will ultimately garner a greater consensus to ease more. ‘Insurance’ rate cuts Ten years into the U.S. economic expansion, we still do not think a recession is imminent. The household sector is in good economic health, and the recent easing in financial conditions will buffer the U.S. economy from a larger downturn. Consequently, we see the Fed’s move as an “insurance” cut designed to keep the U.S. expansion on track amid some recent signs of weakness. As revised GDP data from 2014-2019 show, the U.S. is not immune to global economic developments, and we think the Fed is looking to avoid any tightening in financial conditions that could result. Signs of a softer economy can lead to a loss in confidence by markets and businesses, which can in turn cause banks to reduce lending quickly, ultimately creating tighter financial conditions that further derail activity – a slide toward recession through the so-called “financial conditions accelerator channel.” In our view, the Fed’s rate cut is an effort to manage this risk, and it appears to have worked. Over the past few months, the Fed has taken a more dovish stance and provided forward guidance toward a rate cut, which has contributed to easier financial conditions. We see the potential for at least one more “insurance” rate cut from the Fed to ward off the risk of substantial economic softening. Low inflation is key Although lifting inflation is not the main motivation, low inflation has made the Fed’s easing possible. Inflation in the U.S. has remained near or below 2%, and this lack of threat to price stability should allow the Fed to continue to focus on sustaining economic growth in an effort to achieve its other official mandate: maximum employment. Financial stability risks also appear manageable. Over time, it is possible that lower rates could increase the risk of financial instability by leading to market excesses – including rapid loan growth and asset bubbles – a topic recently discussed by Fed Governor Randy Quarles. But amid higher uncertainty and lower business confidence, midcycle “insurance” rate cuts seem unlikely to unleash the type of irrational exuberance that could cause a destabilizing bubble. And in fact, we think they should help stabilize the economy going into 2020. Learn the key takeaways from PIMCO’s Secular Outlook for the economy, policy, and markets over the long term. ACCESS NOW Tiffany Wilding is a PIMCO economist focusing on the U.S. and is a regular contributor to the PIMCO Blog.
Blog Power of Representation: the ‘Us’es’ To celebrate Pride Month, four PIMCO executives share their perspectives on inclusion and diversity in the workplace and the importance of visible representation.
Blog Assessing Inflation’s Effects Across Emerging Markets The varied responses of individual countries to global inflationary pressures have contributed to elevated real-rate differentials between developed and emerging markets.
Blog Secular Outlook Key Takeaways: Reaching for Resilience We believe shorter business cycles, elevated volatility, and diminished policy responses warrant a focus on portfolio resilience over reaching for yield.
Secular Outlook Reaching for Resilience Volatility, inflation, and geopolitical strain have countries and businesses focusing on defense. We argue for building resilience in portfolios in this fragmenting world, and delve into risks and opportunities we foresee over the next five years.
Blog After Historic Market Moves, Outlook for Bonds Improves This year’s surge in yields is restoring value to the bond market, especially with the likelihood of a recession rising, although it remains uncertain when market momentum might turn.
Blog Chinese Financials Feeling the Squeeze Amid Sluggish Credit Demand Following strong double-digit profit growth in FY2021, we expect Chinese banks will be less profitable this year as COVID-19 lockdowns continue to disrupt China’s economy.
Blog Fed Battles Inflation Despite the Costs The Federal Reserve ratchets up the pace of monetary tightening, raising questions about the U.S. growth outlook.
Blog Fed Battles Inflation Despite the Costs The Federal Reserve ratchets up the pace of monetary tightening, raising questions about the U.S. growth outlook.
Blog Fed Outlook: Expeditious but Nimble Federal Reserve hikes policy rate 50 basis points, while remaining flexible in fighting inflation.
Blog Tug of War: The Fed Begins a Rate‑Hiking Cycle as Inflation Trumps Uncertainty The U.S. Federal Reserve raised the policy rate at the March meeting and signaled more hikes to come given the risks from high inflation.