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‘The outlook has been darkening’: JPMorgan predicts 3 more rate cuts

Javier E. David
Editor focused on markets and the economy

A U.S. economy teetering on the edge of a “classic late-cycle” slowdown will prompt the Federal Reserve to mete out three more rate cuts this year, JPMorgan Chase said on Wednesday.

A dour reading on the manufacturing sector — which contracted last month for the first time in three years — is converging with other indicators that point to a slowdown.

While the Fed’s Beige Book report showed growth is moderate, “the outlook has been darkening,” wrote JPMorgan economist Michael Feroli — particularly amid an intensifying U.S.-China trade war that’s roiling markets.

“As such we now expect the Fed to lower the funds rate by 25bp at each of the three remaining [Fed Open Market Committee] meetings this year, bringing the year-end target funds rate range to 1.25-1.50%,” he added.

‘Signs of domestic fallout are mounting’

JPMorgan’s move comes as others on Wall Street are recalibrating their Fed policy expectations for the remainder of the year — with some expecting the central bank to get more aggressive as the slowdown bites.

“Among the reasons prompting our change in view are some familiar and interrelated: trade tensions continue to intensify, foreign growth forecasts continue to get marked down, and the dollar continues to strengthen,” JPMorgan said, adding that “signs of domestic fallout are mounting.”

CHICAGO, ILLINOIS - JUNE 04: Jerome Powell (R), Chair, Board of Governors of the Federal Reserve speaks to former chair Ben Bernanke during a conference at the Federal Reserve Bank of Chicago on June 04, 2019 in Chicago, Illinois. The conference was held to discuss monetary policy strategy, tools and communication practices. (Photo by Scott Olson/Getty Images)

Questions abound about how the new round of U.S. tariffs, imposed on $550 billion worth of Chinese goods, will impact consumers.

Businesses and retail trade groups have roundly criticized the Trump administration for slapping what amounts to a tax on consumers in the face of a global slowdown.

On Wednesday, Renaissance Macro said it expected a half percentage-point cut from the Fed in two weeks, citing the trade war and muted inflation as force multipliers.

Although banking giant UBS still anticipates a 25 basis-point Fed cut this month, the firm acknowledged that recession risks are on the rise.

“While our base case is for a slowdown rather than a recession, we acknowledge that the risks have increased since the breakdown in US-China trade negotiations back in May,” the firm wrote in a note to clients.

“We see a 30% chance of a US recession starting before the end of next year. If all of the tariffs that have been announced so far are actually implemented, the US economy is likely to be skirting on the edge of recession by early next year,” they added.

AMS

Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek

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