The Federal Reserve will likely cut interest rates next week for the third time this year, according to Goldman Sachs, but the central bank may also signal that the current easing cycle is over.
Markets widely expect the Fed to lower the benchmark federal funds rate by 25 basis points, to a range of 1.50 percent to 1.75 percent, during its Oct. 29-30 meeting, according to the CME's FedWatch tool. Goldman seconded that sentiment in a research note, estimating a 95 percent chance of a modest reduction during the meeting.
“Strong signaling from Fed leadership indicates that the modest trade war de-escalation since September has not deterred them from completing a 75bp, 1990s-style 'mid-cycle adjustment,'" the note said.
However, Goldman economists said they believe policymakers will tweak the Federal Open Market Committee’s post-meeting statement to make it slightly more hawkish — essentially paving the way to hold borrowing costs steady and putting an end to the series of cuts that began in July.
Those changes include removing the phrase “act as appropriate to sustain the expansion," a phrase interpreted by the market as a sign of an impending rate cut, and replacing it with a reference to recent easing and the less decisive “will act as needed to promote its objectives," which references the easing actions already taken.
In approving the previous cuts, Fed Chairman Jerome Powell has cited uncertainty from the U.S.-China trade war, muted inflation and a slowdown in global growth. Since the Fed’s most recent meeting in September, however, President Trump and his Chinese counterpart Xi Jinping have moved closer toward striking a trade agreement. And, Goldman noted, mixed economic data has pushed back against the downside scenarios under discussion (in the U.S., unemployment dipped to a 50-year low last month).
Plus, meeting minutes from September revealed policymakers were divided over whether to lower interest rates then. Those who voiced opposition to a second cut said the economy had not deteriorated since July, when the Fed cut rates for the first time in a decade.
Seven of 10 members voted in favor of lowering rates, with three dissenting. St. Louis Fed President James Bullard supported a larger, half-percentage point cut; Kansas City Fed President Esther George and Boston Fed President Eric Rosengren, meanwhile, wanted to take no action. Goldman said it doesn't expect any other voting member to join George and Rosengren, who are expected to dissent again.
“Powell will have a ﬁne line to walk during the press conference if he hopes to satisfy market participants projecting additional easing as well as the critics of insurance cuts -- both on and off the committee,” Goldman economist Spencer Hill wrote in the note. “Reﬂecting this, we expect a slightly hawkish tone, with Powell alluding to a baseline of unchanged policy but emphasizing data-dependence and the ability to respond quickly if the outlook deteriorates.”