A Fed Funds Rate Cut Is Just a (Small) Matter of Time

The about face didn’t take long, did it? As I noted last week, markets weren’t expecting an actual rate cut at the Federal Open Market Committee (FOMC) meeting June 18-19. And they didn’t get one.

Yet they received a gift almost as good and something I also have been harping about the past few weeks. Though chairman Jerome Powell would never say this, the Fed has changed its spots. The bias, if not the central bank’s stance, is now accommodative. (See page 1.) In two short months, the bank has made a 180 degree turn.

While the FOMC kept the Fed funds rate, now 2.25%-2.50%, unchanged, chairman Jerome Powell said “the case for a somewhat more accommodative policy has strengthened.” That’s all it took.

The stock market hit new highs and bonds rallied, too, as even the lagging DJIA joined in (see page one). And just in case you didn’t get that Fed message, on Friday the central bank’s vice chairman Richard Clarida said the Fed stands ready to curt rates if necessary.

So it appears then that President Trump, who’s been haranguing Powell about cutting rates, has won the latest skirmish. (There was even a report leaked to Bloomberg that said the president looked into how to demote or fire Powell.) Was it the softening world growth data or was it the Trump Threat? Maybe a little of both. While the Fed has insisted it relies on the data and its mandate and is not affected by political pressures, the Fed is made up of human beings.

The CME market continues to place a 100% probability of a cut at the next FOMC meeting July 31 and 83% in September. The CME has been a pretty good indicator of where investors believe rates will be at each FOMC meeting. Still, a 100% probability seems too certain. I repeat 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 100%. I defer to the markets, however, and perhaps the reason is yet to come.

As I’ve noted, 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 yield on the U.S. Treasury 10-year bond fell to 2.06% from 2.08% one week ago. The long term yield spread has steepened (see page 3).

Upcoming: 7/30-31 - FOMC meeting.

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