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Economy | US

Where are Rates Headed?

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  • The Fed returns to its role as global central bank (CB). The surprise 50bps inter-meeting easing on 3 March from the Fed is arguably more important for the rest of the world than for the US itself. This follows as tighter US financial conditions were not yet damaging US economic prospects, but are dominating global financial conditions. Last year, the Fed cut rates by 75bps to offset global trade headwinds and this year, while this year’s 50bps cut is unlikely to be the last. Citi analysts expect a further 50bps cut at the 18 March FOMC meeting, followed by 25bps cut in April and another 25bp cut either intermeeting or in June, bringing rates likely to the zero lower bound.

 

  • Further tightening in financial conditions could be challenging for some of economies more affected by the virus outbreak than the US. As of 8 March, Italy has the third-largest number of confirmed cases outside of China and the Eurozone is also more exposed to weakness in China via supply chain linkages than the US. Tightening financial conditions are also likely to be more challenging, as the ECB is at the effective lower bound. Hence, the Fed’s policy decisions are very important for the Eurozone outlook and more than usual, given the lack of ECB ammunition. For emerging markets (EM), the US dollar is the key risk driver given that it determines capital flows as EM is highly sensitive to US dollar moves.

 

 

  • More global central bank easing is needed. Citi analysts are forecasting 2.5% global growth for 2020, nearly the weakest growth since the global financial crisis, with risk that more downgrades may follow, as the virus continues to spread and real economic data is affected. However, health measures and fiscal easing would also help reduce the high degree of uncertainty. Sentiment is key for the economic outlook and hits to sentiment are likely to result in weaker real activity data with a lag of 2-4 months. The final drag on the US economy is likely to depend on the number of virus cases in the country.

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