Tee Time – the Federal Reserve is Gearing Up for a Cut in Interest Rates – June 24, 2019
The Federal Reserve kept the fed funds rate at 2.25-2.50% at its two-day meeting last week, but the Fed noticeably shifted its stance based on its post-meeting statement and fed funds rate projections.
Highlights
No longer is the Fed “patient (its operative word in recent months)” as it considers any changes in the fed funds rate. Instead, the statement borrowed a line from Fed Chief Powell’s June 4th speech, putting rate cuts on the table.
Probably the biggest surprise was the dovish tone from the Fed’s so-called dot plot, which offers a ‘best guess’ from each Fed official as to what he/she believes is the most appropriate year-end fed funds rate.
As illustrated in Table 1, seven officials believe a 0.50 percentage-point cut in the fed funds rate this year is appropriate, and one believes a 0.25 percentage-point cut is the way to go.
Following the March 20th meeting, no one foresaw lower rates. Moreover, Powell said that many who didn’t project a cut believe the case for an easier policy “has strengthened.”
Behind the new stance
Powell said “70% of the economy is quite solid,” but he added, “Manufacturing, (business) investment, and trade are weaker.” Any reduction in interest rates we may see this year would be designed to counter growing economic headwinds, but monetary policy isn’t a cure-all.
While volatility can’t be ruled out going forward, the latest upward move began with Powell’s shift on June 4th and culminated with a new high for the S&P 500 Index on Thursday.
Today, the big drop in bond yields is suggesting economic growth is set to slow. But the initial response in the market to the Fed’s shift suggests the economy won’t slide into a near-term recession. Stay tuned.
Created 2019-06-24 15:11:38