Active is: Anticipating what’s ahead
Facing growing geopolitical risks, Fed will likely cut rates
While domestic growth appears robust, international risks are rising – including worsening US-China trade tensions and the growing risk of a hard Brexit. As such, we think the Fed won’t take any chances and expect the central bank to announce a 25bp rate cut at its next meeting.
The US economy remains robust, driven by household consumption, low unemployment and low inflation. Growth in the service sector had slowed in June and July but rebounded in August, with economic activity (as measured by the Institute for Supply Management's non-manufacturing report) at 56.4% – up 2.7 points from July. However, other recent cyclical data points, including a slowdown in job creation, suggest that growth may continue at a more moderate pace.
It is unclear whether the internal dynamics of the US economy can compensate for the deterioration of the international environment. Trade tensions between the United States and China have grown worse, the risk of a hard Brexit persists and global growth has slowed down. Even though Fed Chair Jerome Powell dismissed the risk of recession in his recent statements, these downside global risks are at the heart of his concerns.
In this power struggle between robust domestic growth and increasing international risks, we do not expect the Fed to take any chances. Instead, we expect the central bank to continue its accommodative monetary policy by keeping the cost of borrowing low. In line with its July announcements, we expect the Fed to confirm its intention to support growth by announcing a 25-basis-point cut in the fed funds rate (a basis point is 1/100 of a percentage point). Like the July cut, this would be a mid-cycle adjustment to support growth. We do not currently view it as an entry point to a cycle of rate cuts.
For their part, the markets expect two rate cuts in 2019 and two more in 2020, and we believe these expectations will be met for the time being. The anticipated September rate reduction should allow long-term rates to stay firmly anchored at low levels, and should contain the appreciation of the US dollar.
About the author
Global Chief Investment Officer Fixed Income
Franck Dixmier is Global Chief Investment Officer (CIO) Fixed Income and a Managing Director with Allianz Global Investors. In this capacity, he leads and oversees the development of the firm’s Fixed Income capability and investment offering. He is a member of AllianzGI’s Investment Executive Committee and International Management Group.
Inflation can significantly erode purchasing power, but the ECB may be underestimating the true increase in consumer prices by relying on a narrow measurement. Investors may want to ready their portfolios for a higher rate of real-world inflation in the euro zone, perhaps by employing an actively managed mix of equities, real estate and commodities.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).