Investment Clock insights

Fed opens the door to a rate cut


Melanie Baker

20 June 2019

As expected, the Federal Open Market Committee (FOMC) decided against cutting rates today, but there were signals in the dot plots, the statement and Powell’s commentary that clearly opened the door to a rate cut later this year and potentially soon, depending how things evolve. Powell reiterated in his press conference several times that they wanted to see more first – to see whether uncertainties continue to weigh on the outlook. 
A rate cut looks more likely than not in the second half of this year in my view. If trade tensions escalate even further, more cuts seem likely to follow. The continued shift in the US Federal Reserve (Fed) stance is clearly welcome news for global growth prospects all else equal. 

As expected, the Federal Open Market Committee (FOMC) decided against cutting rates today, but there were signals in the dot plots, the statement and Powell’s commentary that clearly opened the door to a rate cut later this year and potentially soon, depending how things evolve. Powell reiterated in his press conference several times that they wanted to see more first – to see whether uncertainties continue to weigh on the outlook. 

A rate cut looks more likely than not in the second half of this year in my view. If trade tensions escalate even further, more cuts seem likely to follow. The continued shift in the US Federal Reserve (Fed) stance is clearly welcome news for global growth prospects all else equal. 

For now, the target range for Fed funds remains 2.25-2.5%. However, the latest set of FOMC forecasts, the ‘dot plots’, show eight members indicating that they think a rate cut this year would be appropriate; more than 25bp for seven of them and the median FOMC assessment has now factored in a cut for 2020 (then a hike back to current levels in 2021). James Bullard formally dissented at this week’s meeting, preferring to cut 25bp already. Powell said that although eight wrote down rate cuts, a number of others see that the case has strengthened.

Powell’s commentary described changes in the statement as “significant”. In the statement, the FOMC indicate that uncertainties about the outlook have increased and that they will “closely monitor” incoming information and will “act as appropriate to sustain the expansion…”. The word “patient” is also dropped. Hence the Fed has moved away from wording normally associated with an "on hold" stance with a bias to hike and effectively signal more openness to cutting rates. The statement, however, did not characterise risks as on the downside, described economic activity as rising at a “moderate rate” (rather than anything worse) and described job gains as “solid”; the statement lacks a signal that a rate cut will come next month

Several things appear to have weighed on their thinking and account for this shift in signalling from the Fed:

- Powell sounded positive on the consumer and described the baseline outlook as “favourable”. However, since the last meeting, Powell noted that “cross-currents” have re-emerged. “We’ve been mindful of some ongoing crosscurrents including trade developments and concerns about global growth”. 

- Risk sentiment in financial markets has deteriorated too, he said. 

- He also noted continued concerns around inflation and said that the fall in inflation expectations is one reason why the case for easing has strengthened. He noted that the forecasts have inflation picking up more slowly than before. 

- A couple of times he also talked about the importance of sustaining the expansion so that the labour market continues to pull new people into work. He mentioned “very focusing and motivating” commentary from some participants in the Fed’s recent review process that highlighted the importance of maximum employment for low income communities.

So what are they waiting for? Powell returned to the theme a few times, but said that it was important that monetary policy not overreact to any one data point or short term swing in sentiment. Thus they were looking to see if uncertainties continued to weigh on the outlook. He pointed out that some of the developments they were responding to were of “quite recent vintage” and said that they do expect to be learning a lot more in the near-term and said that they will act, including promptly if warranted to sustain the expansion.

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.