Expect Powell To Stay On Hold, Open Door To A July Cut
Faraday Research | Jun 18, 2019 01:29PM ET
Oh, what a difference six months makes!
Back in mid-December, the Federal Reserve raised interest rates for the ninth time this cycle and hinted that policymakers were looking at a couple more hikes over the course of 2019. Now, after a major escalation in the trade war between the planet’s two largest economies and a sustained drop in inflationary measures, the Fed is considering multiple interest-rate cuts by the end of the year:
Source: Forex.com
As the above graphic shows, growth is not a particularly urgent concern for the central bank, but the coordinated deterioration in a variety of inflation indicators certainly is. Back in March, zero members were expecting a rate cut at any point in the next three years and with data generally holding steady (albeit at low levels), there’s no urgency for an immediate rate cut in our view. Instead, Powell and company may use Wednesday’s release to set the stage for a potential rate cut next month.
h3 What To Expect/h3- The central bank may replace the wording in its statement to say that the committee “will act as appropriate” to sustain the economic expansion (instead of “be patient” when setting policy).
- “Housekeeping” updates to the statement (e.g. labor-market gains “have moderated,” increased downside risks from trade, etc)
- Policymakers may also revise down their Core PCE inflation forecasts for the rest of this year (1.8%) and 2020 (2.0%).
- Most “dots” to shift to expect one rate cut by the end of the year.
Such a shift would still leave a dramatic difference between what traders are expecting and the Fed’s forecast; regardless of what happens this week, the gap between Fed forecasts and market pricing for interest rates will be a major dynamic to watch for the rest of the year.
h3 Possible Market Reaction/h3With the market discounting a (slight) chance of a rate cut tomorrow, we could see a minor bounce in the buck and dip in U.S. stocks if the Fed stands pat. That said, the more important reaction will depend on what the statement, economic forecasts and Chairman Powell’s press conference suggest for the rest of 2019.
Get The News You Want
Looking ahead, traders have discounted about three rate cuts by the end of the year. Even in the most dovish of no-rate-cut scenarios, it would be difficult for the Fed to deliver a dovish surprise relative to those expectations. In other words, the dollar could see a short-term dip if the Fed takes a dovish tone, but we wouldn’t be surprised to see the greenback recover in the latter half of the week as traders reevaluate the meeting in the context of the rest of the year.
Cheers,
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.