Fed expected to cut rates next week before hitting pause button

Federal Reserve officials will signal they’re likely to take a break from cutting interest rates after lowering them again next week, according to a majority of economists surveyed by Bloomberg.

In an Oct. 21-24 poll of 40 economists, 85% said they anticipate the Federal Open Market Committee will reduce rates by a quarter percentage point when it wraps up a two-day meeting in Washington, D.C., on Wednesday. That would lower the target range for the Fed’s benchmark rate to 1.5%-1.75%.

In addition, 56% of respondents said in the event of such a cut, policy makers would telegraph, either in their policy statement or through Chairman Jerome Powell’s post-meeting press conference, that they are likely to pause for some time before making another rate move.

“It might well be a hawkish cut as Powell will likely signal some resistance to cut rates more,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management in Geneva.

The Fed has already lowered rates twice this year, in July and September, not because officials forecast a steep downturn but because the risks of such a slump have mounted. Powell last month compared that to taking out “insurance.”

Though U.S. unemployment is low, hiring strong and consumer spending solid, he cited slowing global growth, uncertainty around trade tensions and below-target inflation as reasons to nudge rates lower.

Coming out of this meeting, the big questions will center on whether Powell and other key policy makers believe three, quarter-point cuts represent enough insurance. Even if that is the case, there’s no guarantee Powell will say so. At his September press conference, Powell shied away from providing any signal on future rates despite repeated questioning.

“The Fed is refraining from providing forward guidance, saying rate decisions are on a meeting-by-meeting basis,” said Kathleen Bostjancic, an economist at Oxford Economics in New York. “However, if the Fed intends to pause its rate cuts at the December meeting, look for Chair Powell to provide some signal in his press conference.”

Not all the economists agreed. Brian Wesbury, chief economist at First Trust Portfolios, said he expected no such signal because the uncertainties the Fed has used to justify rate cuts haven’t abated.

“China and the U.S. haven’t come to an agreement, Europe is still slow and weak, and Brexit isn’t done,” he said. “They can’t put a floor under this, because that would argue they’ve already done enough to fix the uncertainty, or that the uncertainty is gone, and it’s not gone.”

According to their median projections, respondents expect the Fed will lower rates once more in 2020. That’s roughly in line with investors. Pricing in fed funds futures implies an expectation for another roughly 40 basis points in easing by the end of 2020.

A separate question showed economists nonetheless seeing significant risks to the U.S. economy. As a group they assigned a 30% median probability that the Fed will cut rates all the way to zero before the end of next year.

Most respondents said they expect the Fed will find sufficient supply in outstanding Treasury bills to execute a new plan aimed at smothering volatility in overnight funding markets.

The Fed announced Oct. 11 that it would initially buy $60 billion a month in bills to increase the level of bank reserves. Just under a quarter, however, said the Fed will be forced to add some purchases of coupon-bearing short-dated Treasuries to reach their target.

Asked about the Fed’s ongoing policy framework review, just 11% said they expect the Fed will formally adopt an inflation-targeting strategy known as average-inflation targeting. A much larger group of 43% said officials will instead alter the language in their annual policy strategy statement to include a reference to hitting their inflation target on average. Another 22% said officials will drop the fixed-point inflation target for a range.

The Fed has failed for most of the last eight years to bring inflation up to its 2% objective. Officials have contemplated a new policy that would require overshooting the target for some time to make up for periods of undershooting.