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Will the Fed cut rates 100bps in 2020?

While the general feeling is the Federal Reserve will keep rates steady this year, not everyone is on board with that view.

Societe Generale expects the Fed to keep rates steady until June (it previously saw a rate cut in March), but its economists “continue to expect aggressive rate cuts amounting to 100 basis points in total on signs of economic slowing and rising risks to the outlook,” according to a report co-authored by Stephen Gallagher, Societe Generale chief U.S. economist and head of research in the Americas.

Although the economy is doing well, which “would seem incompatible with further rate cuts and rising risks of recession,” the market expects at least one rate cut. “We believe the growing disparity between a strong equity market and weak corporate profits is due for reconciliation,” he writes. “The current strength of equities implies healthy growth with modest risks. Weak profits, conversely, should heighten pressure on companies to cut costs to revive profitability.”

But after three rate cuts last year, and the Fed’s balance sheet growing because of repo market issues, Societe Generale expects a delay in its expected cuts. “However, as quickly as risks emerged in 2019 necessitating Fed rate cuts and a reversal in their balance sheet reduction, risks are likely to heighten again in 2020. The market view is likely the result of two camps, those anticipating no cuts, which is what Fed officials advertise, and the other camp expecting two or more rate cuts.”

Offering a different view, Allison Schrager, who just started as a senior fellow focusing on economic policy at the Manhattan Institute: “Assuming there are no negative economic shocks, the Fed will most likely keep rates neutral or perhaps consider a small rate increase or two in response to low unemployment and the start of some inflation,” Schrager said. “This will give them some room to cut rates if the market responds negatively to November's election result or any other sources of political uncertainty.”

Schrager, an economist, journalist and author, “will expand the Institute’s portfolio of work in the areas of public finance, pensions, tax policy, labor markets, and monetary policy,” the think tank said in a release.

“When the Fed undertook its rate increases back in 2018, I think they didn’t realize how restrictive they were being by raising rates at the same time as they were trying to shrink their balance sheet,” Guggenheim Partners Co-Founder Scott Minerd told Yahoo Finance. "The Fed has done this before. They've sought to extend the expansion by pivoting late in the expansion from the tightening cycle."

Separately, Morgan Stanley researchers said the chance of a recession is at the lowest level since June 2018, with just a 16% probability. “Moreover, it is notable that our two models are now converging at lower levels in recent weeks,” the group said in a note. “That’s also consistent with the view of our global economics team that the global cycle is inflecting positively.”

Data
The Federal Reserve Bank of Philadelphia’s Nonmanufacturing Business Outlook Survey showed activity improved at the company level, as the general business activity index jumped to 23.5 in January from 9.1 in December. For regional activity, the index crept to 13.4 from 13.2.

The price and employment indexes eased, while new orders and sales or revenues rose.

Looking ahead, the six months from now index for business at the firm level gained to 55.6 from 53.8, while for the region, the index rose to 36.9 from 28.5.

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