Ready, Set, Fed Time - June 19, 2019

Last week, we looked at how stocks respond to rate cuts. This week let’s look at how the Fed may frame its rate decision and outlook.

  • A rate cut following Wednesday’s meeting can’t be ruled out, but odds are low.

More likely – the Fed emphasizes its flexibility and likely opens the door to possible rate cut(s) in the second half of the year.

Investor’s corner

Today, the economic data aren’t forcing the Fed’s hand. Employment was soft in May, but it has been volatile lately. Retail sales have been upbeat.

However, a high level of uncertainty is being reflected in the bond market, putting pressure on the Fed to act.

  • Investors are pricing in two to three 0.25 percentage-point cuts in the fed funds rate by year end, including one at the July meeting.

Individual projections for year-end rates are likely to be more dovish than March, but we may see projections that come up well short of investor expectations.

If that happens expect Powell to highlight—

  • The uncertain rate path going forward,
  • The difficulty in relying on rate forecasts,
  • The uncertainty created by trade tensions, and
  • The Fed’s willingness to respond.