Fed Holds, but Hints Strongly that Cuts are Coming

Dan North
Dan North Chief Economist North America

As expected, the Federal Reserve held the Fed Funds interest rate unchanged at today’s meeting. However the materials accompanying the policy decision showed significant changes and strongly hinted at interest rate cuts in the near future. EH believes that there will be two cuts this year with the first one coming at the July meeting.

The accompanying statement dropped the word “patient” which had been used for some time to describe the Fed’s approach to deciding on interest rate moves. Instead it added the phrase that the Committee will “closely monitor the implications of incoming information for the economic outlook and will act as appropriate…” The statement also downgraded the Fed’s assessment of the economy from “solid” to “moderate”. The Fed directly addressed falling market-based measures of inflation compensation as having “declined” compared to “remained low” in May. Indeed he projections for Personal Consumption Expenditures (PCE) inflation for 2019 were downgraded from 1.8% to 1.5%, with the core PCE going down from 2.0% to 1.8%.

The statement also noted that “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased” (emphasis ours).

During the press conference, which is still ongoing, Powell said “The case for somewhat more accommodative policy has strengthened.”

The “dot plot” showing where members of the Federal Open Market Committee (FOMC) believe the Fed Funds rate will be at the end of the year, shifted downward sharply. Eight of the 17 members of the FOMC now see a cut this year, and seven of them see two cuts. In March none of them had expected a cut. 

Finally, there was a dissent on the vote for the first time in the Powell era. St. Louis Fed President James Bullard wanted a rate cut today.

Overall the decision and the accompanying materials suggest an imminent rate cut as the Fed faces a slowing economy, below-target inflation, and trade concerns. Currently the Fed Funds futures market is indicating a 100% chance of a cut in July, up from 86% yesterday. Just one month ago the chance of a cut was only 25%. It has been a remarkable shift in market sentiment driven by dovish commentary by the Fed over the past few weeks, weak economic data, and increased trade concerns.

Read More in our Weekly Export Risk Outlook

Weekly Export Risk Outlook - June 20, 2019

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