Following their June meeting, the Federal Open Market Committee (FOMC) made no change to the 2.25-2.50% range for the fed funds rate. However, member appeared split on the outlook, with one member voting for a cut today, while others expect cuts towards the end of the year. This does seem to raise the probability significantly for a cut in July or September.
The formal statement reflected a change in economic growth from ‘solid’ to ‘moderate,’ and although household spending has picked up, business capex spending has remained soft. The inflation picture was acknowledged as weakening, while long-term expectations remained unchanged. As expected, the term ‘patient’ was removed, with concerned noted about a variety of ‘uncertainties.’
This was largely as expected, although in recent weeks, futures markets had begun to price in a 20-25% chance of a quarter-point cut at this meeting. The odds for a rate cut down the road, though, have risen sharply, with December futures implying probabilities for 2-3 cuts by year-end, and more in 2020. This seems a bit extreme on the surface, but markets do tend to overshoot, with the fed funds assumption markets being no exception.
The narrative, at least from the market’s perspective, has certainly changed, with the possibility of easier monetary policy rising in light of a possible longer trade negotiation with China and the ramifications of imposed tariffs in the meantime resulting in global slowdown risks. However, in recent speeches, the Fed hasn’t alluded to cutting rates specifically—merely that they would do as they always do and ‘act as appropriate’ to stabilize the economy. This is particularly tricky now, though, with economic conditions continuing to show modest expansion for the most part, but with greater uncertainty on the margin, so the Fed has been put into a bit of a corner. Historically, merely seeing potential for slowing hasn’t been a clear path to rate cuts without concrete reports of deteriorating data. This is in contrast to hopes by some for ‘insurance’ cuts, which would presumably be made as a hedge against bad outcomes that may or may not unfold—a strategy that the Fed hasn’t generally used. The President’s continued calls for lower interest rates to sustain the economic expansion have also represented a political (and an integrity) burden on an otherwise independent entity...