AFTER THE PARTI IS SEENING THE HANGOVER: Why do these strategists see Fed reduction rates in 3 years

• Jerome Powell, President of the US Federal Reserve, says the best way forward is to continue to gradually raise the federal funds rate
• The Commonwealth Bank, like most others, thinks that the Fed will make four more
• However, driven by the likelihood of a brutal economic slowdown, it expects the Fed to cut rates, not rise, by early 2021

"With a labor market Our objective and the risks to the outlook are almost balanced, the FOMC believes that – for the moment – the best way to move forward is to continue to gradually federal funds rate, "said Jerome Powell, president of the US Federal Reserve.Building the view that the labor market is strong and inflationary pressures are strengthening, the Fed intends to continue the process of Gradual realization of interest rates despite increased uncertainty about global trade prospects.

The "for now" warning of well, in particular, has received a lot of attention in the markets, seeing speculation about how long the Fed tightening cycle will come back to the surface.

Joseph Capurso, Senior Currency Strategist at the Commonwealth Bank, thinks he knows the answer.

June 2019, to be precise.

"We have improved our US GDP forecast for 2018 from 2.6% to 2.7% and for 2019 from 2.1% to 2.3%," he says

"On our Forecasts, the FOMC will increase the rate of another four funds from June 2019, which could put the funds at 0.5% above neutrality. "

Four new increases in the federal funds rate l 39 next year, leaving the political parameters slightly restrictive given that the economy is expected to grow faster than its potential growth rate of about 1.5-2% per annum, which puts pressure on the rise on wages and inflation.

Capurso's point of view is no different from that of many economists and current financial markets.

He thinks rather than leading to a deceleration economic growth, the recession should be quite brutal, especially if we consider The level where policies become restrictive is likely. be significantly lower than the p ast.

"We expect US GDP growth to decelerate to 2.3 percent in 2019, 1.5 percent in 2020 and 1.3 percent in 2021," he added, adding that his forecast is lower than those of American economists. "US economic growth will slow over the next few years due to the revival of US fiscal policy, a tightening of monetary policy, both by higher interest rates and a balance sheet. the Fed weaker, Capurso this viewpoint reflects that the level where the real rate of federal funds – the nominal rate minus inflation expectations – becomes restrictive for economic activity dropped materially over the course of three last decades, from more than 4% in the early 1980s to about 0.5% today.

Even with the expectation that the federal funds rate will peak in a slightly restrictive territory, since the slowdown in growth is likely to lead to lower inflationary and wage pressures, Capurso is not expecting "We expect the slowdown in economic growth and the easing of wage and price inflation will prompt policy makers to react in 2021," he says.

In other words, the easing of policies.

"We marked the beginning of the FOMC's next round of monetary easing in the first quarter of 2021.

" We expect the FOMC to reduce the fund rate by about 2, 0 percentage points to 0.75-1.0 However, the risk is that the rate reduction cycle is concentrated in 2021. "

Although that sounds like a lot, Capurso says that it would actually be very small by past standards and in line with the view that US economic growth will slow rather than shrink.

"We expect the FOMC to continue to adjust the rate of funds in increments of 0.25% while maintaining the target bandwidth of 0.25%, "he says.

Parallel to the 25 basis point reduction Capucso says the FOMC will likely stop reducing the size of its balance sheet – known as quantitative tightening – in the early stages of 2020, leaving it around $ 3.25 trillion US, well above the US $ 900 billion level However, while it expects the Fed to stop allowing maturing investments to sell off its balance sheet, Capurso does not expect the Fed to launch a new round of quantitative easing, pointing out that a policy option, it would probably prefer to use rate cuts, rather than buying badets, to cushion the economic downturn.

Regarding the greater risk of his call, Capurso thinks that it comes from tax policy, especially before the next US presidential election scheduled for late 2020.

"The Darker Economic Outlook the US in 2020 and 2021 could encourage President Trump to implement more fiscal stimulus in the run-up to the November 2020 presidential elections. "

" As a result, [this] could encourage the FOMC to delay the beginning of a cycle of rate reduction. "

There are many moving parts and badumptions in Capurso's forecasts, as there are in all matters relating ;to come up.

However, if one thing is certain, it is that it promises to be some interesting years ahead.

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