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27 Jan 2020

International Economy

Fed May Keep Policy Rate Unchanged in 1Q20, But Additional Rat Cuts Likely Prior to Presidential Election in November 2020 (Business Brief No.3846)

                We at KResearch view that improving signs seen in the US economy overall will continue to provide the Fed room to keep its policy rate steady at least until 1Q20. However, the US manufacturing sector has not substantially recovery despite the signing of the first phase of a broader trade pact between the US and China. The US manufacturing sector has been a major casualty of the US-China trade war while the global economy remains in the doldrums, as reflected by the ISM Manufacturing Index that stood below 50 for the fifth consecutive month. Meanwhile, under the first phase of the US-China trade deal, the US will only marginally cut tariffs on Chinese imports, which are largely finished products. Intermediate products the US imports from China as raw materials for its manufacturing sector will continue to be subject to high tariffs. In addition, the global trade remains sluggish on the back of the slowing global economy and uncertainties surrounding global trade disputes and the possibility that major economies may crash. If the US manufacturing sector cannot recover over the near term, the US labor market will likely be adversely affected. As a result, the Fed may consider raising additional policy rates during 2Q20.

             Meanwhile, close attention must be paid to the coronavirus (2019-nCoV) outbreak because it may affect China's compliance with the trade pact and global consumption, including the US, if the epidemic spreads. The coronavirus outbreak may inhibit China to purchase more goods worth USD77 billion from the US in 2020 and USD123 billion in 2021. If China fails to comply with the trade agreement it entered into with the US, negotiations for the second phase of the trade deal could be delayed.

                  Looking ahead, there is a possibility that the Fed will cut its policy rates further to sustain the US economic growth although the Fed often avoided changing its monetary policy prior to Presidential elections in the past. However, the Fed's monetary policy stance prior to Presidential elections tends to be consistent with the US economic cycle. At present, the US economy is at the end of the longest economic cycle ever in history amid heightened risks to the US economic growth. This means that Fed will likely lower its policy rates further to maintain the US economic growth before the Presidential election scheduled for November 2020.  

International Economy