We have moved our expectations for the timing of the second fed funds rate cut from later in 2019 into September 2019 on the account of the additional downside risks from the most recent tariffs announcement. In addition, we see a significant risk of an additional (third) 25-basis-point easing this year. (By comparison, our previous call was that there would be a second 25-basis-point rate cut this year but that it would come later than September.)
But what if the additional tariffs aren’t implemented on September 1? We expect the tariffs to be implemented unless there is an agreement between U.S. and China. An agreement would be a substantial improvement, boost risk appetite, and provide relief to the economy. That would take some pressure off the Fed. In that case, the second cut would still happen–but likely later–on account of the softening in the economic outlook that we would still expect. The need for a third cut during 2019 would be lower.