Fed Says “No” to Rate Hikes While Futures Traders See Nearly 50% Chance of Rate Cut

“The fed funds futures market is assigning a 47.8 percent probability of at least one rate cut by January 29, 2020,” according to the CME’s FedWatch tool. 
James Hyerczyk
US Economy

The U.S. Federal Reserve kept its benchmark interest rate unchanged on Wednesday as widely expected and said in its monetary policy statement that it doesn’t expect to hike rates for the rest of the year. That’s a major change from its December policy statement when it said it expected to raise rates at least two times. Furthermore, Federal Reserve Chairman Jerome Powell said he expects a “slowdown” but not a recession. Additionally, the central bank also expects the U.S. economy to expand at 2.1 percent this year, below its previous projections.

Benchmark Interest Rate

The Fed announced it was holding its benchmark interest rate inside its current range of 2.25 percent to 2.5 percent and trimmed its expectation of two rate hikes this year to none. It also said it projects one quarter-point rate hike in 2020 and none in 2021.

Monetary Policy Statement Changes

In its policy statement, the Fed said that the job market remains “strong” but noted that “growth of economic activity has slowed” since late 2018.

Balance Sheet Adjustment Changes

The Fed also said it will stop reducing its bond portfolio in September. Shrinking the balance sheet is a form of monetary policy tightening. The new move by the Fed is a step that would help hold down long-term interest rates.

Net Effect of the Changes

Combining the new policies means no more major increases in borrowing rates for consumers and businesses. Furthermore, it opens the door for a potential rate cut later this year if the economy slows as much as some analysts fear.

Financial market traders have become more convinced that the Federal Reserve will be more accommodative on interest rates.

“The fed funds futures market is assigning a 47.8 percent probability of at least one rate cut by January 29, 2020,” according to the CME’s FedWatch tool.

Futures contracts are also implying a 39 percent probability of a rate decrease by December 11, up from only 23 percent before the Fed’s policy decision at 18:00 GMT on Wednesday.

External Factors Influence Fed Decisions

One reason for the Fed’s pause in credit tightening is in response to a slowdown in the U.S. economy. “We foresee some weakening, but we don’t see a recession,” Federal Reserve Chairman Jerome Powell said Wednesday in a press conference. The Fed also said that while the labor market remains strong, “growth of economic activity has slowed from its solid rate in the fourth quarter.” The Fed also said that a slowdown in the global economy also contributed to its decision to stop its rate hikes in 2019.

Powell Remains Upbeat

Shrugging off the recent dip in U.S. economic growth, Fed Chair Powell said that U.S. “economic fundamentals are still very strong,” adding that Fed officials “see a favorable outlook for this year.”

Fed policymakers also said that they expect the U.S. unemployment rate, now at 3.8 percent, to tick down to 3.7 percent by year-end.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.