The Fed Funds Rate Cut Watch Is On

Next week sees a Federal Open Market Committee (FOMC) meeting June 18-19 but markets don’t expect any fireworks, to judge by the CME’s fed futures market. (The FOMC sets the Federal funds rate, the interest rate at which depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis.)

The CME market has been a pretty good indicator of where investors believe rates will be at each FOMC meeting. Currently, futures have a probability of a first rate cut at almost 90% at the July 31 FOMC meeting.

I have to interject that in my years of watching the Fed, a rate change in mid-summer without a compelling reason seems less likely than the CME’s 90%. I defer to markets, but my read of it is, as I have noted, the Fed has clearly changed the direction of its stance and it’s only a matter of time for a cut. I’m guessing September. The Wall Street Journal recent poll of economists says three-quarters of them look for a reduction by the fall.

The Fed has its hands full with conflicting data. The world economy is slowing down but inflation isn’t threatening and hasn’t yet sustainably approached the Fed’s 2% target. The U.S. May import price index dropped 0.3%, according to data released Thursday. That follows a May inflation report that showed growth in consumer prices slowed to 1.8% on the year and a May producer-price index rise of just 0.1% from the previous month. Clearly, inflation isn’t a threat.

The yield on the U.S. Treasury 10-year bond was flat at 2.08% from one week ago. Yet the rate curve steepened, as the two-year note fell faster and harder than the 10-year.

Upcoming: 6/18-19 - FOMC meeting. The press conference afterwards needs watching. The next FOMC meeting is July 30-31.

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