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Playing the Fed's Rate-Cut Odds

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Wednesday, June 19, 2019

With no major economic data being released ahead of the opening bell today, and Q2 earnings season now in the rearview mirror, all eyes turn to the Federal Reserve. This afternoon, Fed Chair Jerome Powell is expected to give public remarks on the state of the U.S. economy, even though expectations are low he will be announcing a 25 basis-point interest rate cut.

Overall, Powell has proved to be a cautious Fed Chair in his year-and-a-half tenure, increasing rates routinely early on, in step with a growing U.S. economy. Even after U.S.-China trade tensions kicked off last fall, Powell announced another hike after the Fed’s December meeting, inviting the ire of President Trump and helping send market indexes into a tailspin that came to a merciful end on Christmas Eve’s half-day session.

After the Fed’s last meeting six weeks ago, Powell said, “We don’t see a strong case for moving [interest rates] either direction.” This stoked another U.S. market tumble that lasted weeks, until the Fed Chair came back to change his tune early this month, opening the door for consideration of a rate cut. To be clear, when Powell says “rate cut,” he is thinking in terms of quarter-points; Trump, on the other hand, has aggressively advocated for a cut of 100 basis points — even though the case for such a drastic move has been articulated by no one.

Analysts expect the verbiage from this afternoon’s statement to change, even as rates likely remain in the 2.25-2.50% range they’ve been in since the December hike. We look for the word “patient” to be removed from today’s statement, which has indicated the Fed has felt free to delay interest rate moves. With the U.S.-China trade tensions continuing — though abating, with news that Trump and Xi will have an “extended meeting” at this month’s G-20 summit — plus war footing returning to the Middle East, immigration concerns and a host of other issues, the new Fed statement may view the economic outlook as on a slight downward trend.

Currently, two rate cuts are baked into the cake for market participants: July and September. Assuming these would both be for 0.25%, we’d be back to a 1.75-2.00% Fed funds rate by this fall. Of course, a signed new trade pact with China, a resolve of sorts in the Strait of Hormuz and a cooling of tensions on immigration reform would all be reasons to refrain from cutting rates. Though all these things would improve global economic conditions overall.

Mark Vickery
Senior Editor

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