In line with broad market expectations, the U.S Federal Reserve cut interest rates by 25 basis points to a range of 1.5% to 1.75%, in response to continued slowdown in the U.S economy amid ongoing trade disputes and weak global growth. Notably, this represents the third cut in four months, as concerns about the impact of the trade war-on the world’s largest economy and by extension the global economy- have increased over the past months.
The decision of the U.S Fed came at a time when the US Commerce department reported a GDP growth of 1.9% in Q3, the first time since Q4 2018 in which the US economy has grown at a rate slower than 2%.
The Chairman of the U.S Federal Reserve, Jerome Powell however indicated that the Fed would hold rates steady for the foreseeable future. According to him, the current level is “likely to remain appropriate” given the Fed’s economic outlook of moderate economic growth, a strong labour market and inflation growing at around 2%. Interestingly, the FOMC also removed a key clause that had appeared in prior post-meeting statements since June saying it was committed to “act as appropriate to sustain the expansion”.
In our view, we believe the body language of the U.S Fed suggests that the path of the target range for the federal funds rate would be more reliant on data emanating from labour market conditions, inflation expectations as well as developments in the financial markets. Moreover, less uncertainty on trade, as the US was close to a “phase one” deal with China, could help to improve business confidence.
Given the deceleration in the global economy (IMF recently cut its growth forecast for the global economy to 3.0%, the slowest pace since the global financial crisis), we believe the global monetary stance will remain accommodative in the short-term, leaving global interest rates low. Therefore, we expect carry trade to remain attractive.
However, we think appetite for EMs assets will remain capped by lingering trade doubts which may continue to stoke the demand for the U.S dollar as a safe-haven asset. We highlight that a trade deal between the U.S and China remains the biggest catalyst for emerging markets assets as reduced uncertainty will support a risk-on environment.