Our Global Chief Economist, Seth Carpenter, explains why, despite
last week’s big Fed move, there’s still plenty of uncertainty in
global markets and questions about how other central banks will
respond.
----- Transcript -----
Seth Carpenter: Welcome to Thoughts on the
Market. I'm Seth Carpenter, Morgan Stanley's Global Chief
Economist.
Today, I'll be talking about the Fed meeting, where they cut
rates for the first time in this cycle, and what it means for the
economy around the world.
It's Monday, September 23rd at 10am in New York.
The Fed cut rates by 50 basis points; but we did not see a huge
shift in its reaction function. Rather, the 50 basis points was
to show a commitment to not falling behind the curve -- to use
Chair Powell's words. From here, the most likely path, from my
perspective, is a string of 25 basis point cuts. Powell has again
demonstrated that the Fed can move gradually, or quickly,
depending on perceptions of risk.
But for now, judging from Powell, or other policy makers
comments, the Fed still sees the economy as healthy in the labor
market; as solid. But another payroll print of 100, 000 or
softening in consumer spending, well, that would tip the balance.
So, the market debate will continue to focus on the pace of rate
cuts and the ultimate landing zone.
Our baseline is a touch more front loaded than the dot plot would
imply; with us expecting the funds rate to reach just below 3.5
per cent in the middle of next year, rather than the end of next
year. The Fed's projections have declines in the target rate into
2026 and beyond, but I have to say the dispersion in the dots
that they put up shows just how much consensus is yet to be built
within the committee. And, as a result, the phrase data
dependency, well, that's not a term that we want to drop from the
lexicon anytime soon.
The magnitudes of the changes differ, but a comparison that we
have made often here is to the 1990s, and that cutting cycle
eventually it paused as the economy stabilized and continued to
grow. So, there are lots of options for where we go next.
Globally, central banks will be adapting and reacting both to
global financial conditions like this Fed rate cut, as well as
their domestic outlook. Among emerging market economies, Brazil
and Indonesia make for useful case studies. With an eye on
defending its policy credibility and on market expectations, the
central bank in Brazil hiked rates to 10-and-three-quarters per
cent this week after a cutting cycle and then a long pause. A
weaker currency is the external push, but strong domestic growth
is the internal consideration and both of those imply some
inflation risks.
The Bank of Indonesia cut rates after a strong appreciation in
the currency, which lowered the risk from inflations, and it
really enabled them to change their footing.
Now, for DM central banks, the 50 basis point cut really doesn't
materially shift our expectations for what's going to happen. If
we are right, and ultimately we get a string of 25 basis point
cuts, there's little reason for other developed market central
banks to really adjust what they're doing. In Europe, we're
waiting for inflation data to confirm the slowdown after the
softening of wages that we've seen. So, we have high conviction
that there's a cut in September, and we expect another cut in
December.
Now, more cutting by the Fed might lead to a stronger Euro, which
would reinforce that inflation trend, but I don't think it would
be enough to really change the path and prompt more aggressive
cutting from the ECB. After skipping a rate move in September,
given all the question marks they still see about inflation in
the UK, we think the Bank of England restarts their cuts in
November.
The split decision at this most recent meeting shows that the MPC
is not making frequent adjustments to its plan based on small
tweaks to the incoming data. And finally, for the Bank of Japan,
we expect them to stay on hold until January. The meeting for the
Bank of Japan was primarily about communication, and indeed,
Governor Ueda's comments did not prompt the type of reaction that
we saw at the July meeting. So, if we're right, and the Fed's
path is mostly, like we think it will be, these other developed
market central banks don't have to make big changes.
So, the Fed didn't really fully recalibrate its outlook. Instead,
what it did was signal a willingness, but just a willingness, to
make large shifts; with no clear indication that the fundamental
strategy has changed.
The market implications seem like they could be clear. With the
Fed easing, amid economic conditions that remain resilient, that
should be positive for risk assets. But the Fed is also trying to
prevent complacency, and I have to say, uncertainty is plentiful.
If for no other reason, we've got an election coming up, and that
makes forecasting what happens in 2025 very difficult.
Thanks for listening. And if you enjoy this show, please leave us
a review wherever you listen to podcasts and share Thoughts on
the Market with a friend or colleague today.
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