BMO Capital Markets: Weaker Economic Growth Implies More Potential Rate Cuts

by: FP Trading Desk

All eyes are on the U.S. Federal Reserve this week, with the central bank expected to cut the fed funds rate by 25 basis points to 5.00%. The announcement is due on Tuesday at 2:15 p.m. ET. A cut would mark the first reduction since the summer of 2003, while the Fed’s statement itself will be closely scrutinized.

BMO Capital Markets economist Michael Gregory recalls that when the fed cut the discount rate by 50 basis points to 5.75% on August 17, it said “that the downside risks to growth have increased appreciably” due to tighter credit conditions.

So does this mean “the risks are now balanced, or tilted to the side of weaker economic growth?” he asked.

If it is weaker growth, this implies more potential rate cuts than the former, Mr. Gregory told clients in a note.

“The Statement might also shed more light on the Fed’s reluctance to cut its key policy rate, and its reliance on an array of other measures, including moral suasion, to mitigate the dislocations in credit and money markets,” he added. “This, too, will be used to gauge prospective rate cuts.”