Rate Cuts Coming Soon to the Fed’s Menu?

It’s official. Rate cuts are not only on the table, but will probably be served relatively soon.

The U.S. Federal Reserve Bank has now fully walked back its hawkish talk from last fall, the policy stance that many say was a big factor in the fourth quarter’s awful stock market performance.

And if there were any shadow of a doubt, just look at the market’s performance last week (see page 1), after the idea of Federal funds rate cut began to get strong mention, if not support, from Fed officials. Despite its continual attempts at cryptic remarks, when the Fed talks its comments get around and the signal is loud and clear.

For example, Fed Governor Lael Brainard suggested she is open to lowering rates. She told Yahoo Finance that current trade policy is a negative for the U.S. economy. It’s “definitely a downside risk to the economy and our job is to sustain the expansion and we’ll need to see going forward what that means for policy,” she said. “We’ll be prepared to adjust policy to sustain the expansion.” Clearer still were comments from St. Louis Fed head James Bullard, who has said that a cut “may be warranted.”

While Fed Chairman Jerome Powell never said a cut was warranted—why would he?—he did say last Tuesday in a speech that the bank is “closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.” That’s Fedspeak for “We’ll cut if we must.” The Powell Put lives. Of course, some Fed officials are hesitant, like Dallas Fed President Robert Kaplan, but Wall Street banks, like Barclays and JP Morgan, have jumped on the rate cut bandwagon.

Friday’s May soft jobs report has raised the likelihood of an interest-rate cut.

As I have noted, time and time again, the CME Fed futures market has been a decent-to-good predictor of where rates are headed, even better than the Fed itself. Last week, the futures moved from a better than 50% chance of a rate cut in September (as seen the previous week) to—as of late Friday—an 84% chance now of a rate cut in July. Meanwhile, the dollar fell as investors anticipate a rate cut.

The yield on the U.S. Treasury 10-year bond fell to 2.08% from 2.13% 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. That’s going to be interesting.

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