No Longer Patient, The FOMC Hints at Rate Cuts

The FOMC statement was more dovish than expected but the signals remain mixed, there might be a rate cut but maybe not if trade relations improve.
Anthony Darvall
Federal Reserve Building

FOMC Rates Are Virtually Assured In 2019

The FOMC exceeded the market’s expectations on Wednesday. The market had been expecting a dovish turn of phrase but not quite the downshift in outlook the Fed delivered. The FOMC left its policy unchanged but hinted at future rate cuts this year. These hints, accompanied by a near 0.5% downgrade in the average members 2019 target rate, have virtually assured a rate cut will happen next month.

The Fed’s reasoning is simple, there are growing domestic and global risks to economic growth. Those risks are having an effect on activity, U.S. economic expansion is still underway but the pace of acceleration is slowing. Inflation data at all levels suggests cooling in the economy. If it cools too much more the Fed may be forced to act aggressively in support of expansion. The CME’s Fed Watch Tool is pricing in at least one cut next month and the odds for two are rising.

The Case For Lower Rates Is Building

Most FOMC members lowered their outlook for interests by at least a half percent. Despite this downshift, the general consensus remains no rate cuts this year but more cuts next year. Powell, in his remarks, says the case for lower rates is building which the market took to mean weak data would push the Fed to act at the next meeting. Today’s Philly Fed MBOS manufacturing survey shows growth in the sector slowed to near zero, another indication lower rates are needed.

The yield on the ten-year Treasury fell in response to the news. The rally in bonds sent the yield below 2.0% for the first time in over three years. The move deepened the yield-curve inversion and raised the chance of future economic recession. The dollar weakened considerably following the Fed’s release. It shed more than 1.0% in under 24 hours.

There Is Risk To The Outlook

The biggest risk to the U.S. economy and the FOMC outlook is global trade relations. With trade relations in doubt and economic activity slowing interest rate cuts look all but assured. The risk in trade, however, is two-edged. While souring relations have had a negative impact on economic activity improving relations will do the opposite.

There is little expectation Trump and Xi will reach a deal in the near-term there are indications there is still hope for a deal this year. Both sides have indicated, with optimism, that talks between the two are planned for the G-20 meeting. Any positive development in trade relations will be a catalyst for activity and that may be enough to keep FOMC rate-cuts at bay.

The article was written by Anthony Darvall, Chief Market Analyst at easyMarkets

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