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Fed's July rate cut likely not a 'one-and-done,' analysts say


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Fed's July rate cut likely not a 'one-and-done,' analysts say

The Federal Reserve could cut interest rates again as early as next month since the risks hovering over the U.S. economy are unlikely to subside soon, analysts say.

The latest example of those risks came a day after the Fed's July 31 rate cut, as President Donald Trump announced that the U.S. would add a 10% tariff on $300 billion of Chinese goods starting in September. Stocks fell after Trump tweeted about the tariff escalation, with the S&P 500 Index slumping 0.75% to 2,958.05 as of 2:55 p.m. ET.

Futures markets also piled onto bets that the Fed will cut rates by 25 basis points again at its September meeting, according to the CME Group's FedWatch tool. Investors now see an approximately 70% chance of another rate cut and a 30% chance of the Fed staying put.

The Fed's policy easing was its first since the financial crisis, and Fed Chairman Jerome Powell left the door open for further cuts if needed. But even before the latest trade news, analysts said the Fed's rate cut was unlikely to be a "one-and-done."

"Trade policy discussions between the U.S. and China are likely to take time, risks of a hard Brexit have increased in recent weeks, and concerns over soft inflation are likely to persist through year-end, if not longer," wrote Michael Gapen, chief U.S. economist at Barclays, who sees the Fed cutting rates again next month. "Hence, we believe the factors that led the Fed to ease ... are likely to be present in great enough magnitude to lead them to reduce policy rates further."

How much the Fed's rate cut will boost economic activity is unclear.

"It's helpful, but I wouldn't expect anything significant or even measurable as far as an impact on either consumer spending, business debt expenses or economic growth," said Joel Naroff, president at Naroff Economic Advisors.

Powell told reporters that the July 31 cut should be viewed in the broader context of the central bank's monthslong communications shift. In December 2018, the Federal Open Markets Committee raised interest rates and signaled a need for further hikes, helping spark market volatility as investors feared more tightening ahead. But Powell abruptly shifted the Fed's message in his first public remarks of 2019, saying the Fed "will be patient" on any rate changes and is "listening carefully" to concerns over slower growth. In June, Fed officials expressed greater concern over economic risks and signaled greater willingness to counteract them, helping to support a boost in confidence and economic activity, Powell argued.

"I wouldn't take credit for all of that, but I do think that increasing policy support has kept the economy on track and kept the outlook favorable," Powell said.

The Fed chief noted that financial conditions have eased since June, helping to boost the underlying environment for continued spending and growth.

If easier financial conditions are a key motivator for the Fed, then further rate cuts will be necessary, according to Ellen Zentner, Morgan Stanley's chief U.S. economist. That is because the current state of financial conditions is predicated on market expectations of more Fed easing.

"While this may not be the start of a full easing cycle as Chair Powell underscored, we expect the FOMC will deliver one additional [25-basis-point] cut before year end," Zentner wrote in a research note, projecting the rate cut would come at the end of October.

Fed keeping its options open

Powell sent few explicit signals about the Fed's future plans, leading to some market volatility during his news conference.

Markets dropped sharply after Powell said the cut was a "mid-cycle adjustment" and contrasted it against "the beginning of a lengthy cutting cycle." They then recovered somewhat after Powell clarified that he "didn't say it's just one [cut] or anything like that."

Powell was trying to strike a balance between being too dovish and too hawkish, and it did "not seem like he pulled it off," wrote Ryan Sweet, an economist at Moody's Analytics.

If Powell's message was hazy, it may be partly due to a lack of consensus at the Fed over its next steps. Two of the Fed's voting members this year, Boston Fed President Eric Rosengren and Kansas City Fed President Esther George, dissented on the rate cut, and other nonvoting members came out against a rate cut ahead of the meeting.

The Fed chief also emphasized that officials are still learning how to account for trade uncertainty in their outlook, at one point saying he "would love to be more precise."

While markets want predictability and clarity from the Fed, officials are facing quickly shifting scenarios that are tougher to forecast and communicate, said Eric Sims, an economics professor at the University of Notre Dame.

"It's very hard to be clear when the underlying situation is itself not clear," Sims said.