If the Federal Reserve meets market expectations and lowers interest rates this year, it will be more a means to boost declining trust than to fight a specific disease.
After all, most signs of a positive economy persist when somewhat slower. Growth is unlikely to keep pace with the rapid pace of 2018 and the first quarter of 2019, nor does it seem prepared to reverse the country and into a recession.
However, the financial markets – not to mention the White House – are demanding. "In a sense, the biggest thing they can achieve now is more sense and reason than it's fundamental," said Jim Paulsen, chief investment strategist the Leuthold Group. "You run the risk of doing one thing now because you scare people more than they help them, but the longer you wait, the bigger the risk becomes, and if you're early, you have a better chance of changing your mood than if the data tells you. " you have to relax that.
When asked if he believes the Fed should cut short, Paulsen said, "I do not know if they do that, I'm not even sure they have to. But I'm worried about the mood cessation.
Expected at least two cuts
Markets are a bit safer than Paulsen.
In fact, futures traders have priced in almost completely, rather than one, before the year's end, one in September and one in December September easing was around 90% on Tuesday, while a second cut in December's key interest rate was around 82%, according to CME's FedWatch tool.
Some Wall Street strategists have even become more aggressive in their expectations. Barclays saw a 75bps decline by the end of the year, with the Fed shedding half a point in September and another quarter in December, with Evercore ISI seeing three cuts, the last in March 2020.
"We now see a baseline case in which The Fed will cut interest rates three times in a mini-easing cycle starting in September to hedge against downside risks related to hands conflicts, "said Evercore economists Krishna Guha and Ernie Tedeschi in a note," although we do not believe that [Federal Open Market Committee] has yet reached that conclusion and there is a significant opportunity to stay on hold with interest rates on hold. "The reasons for rate cuts are driven by some key dynamics: fears that a prolonged deadlock between the US and China could lead to a stronger global slowdown and the persistent and increasingly aggressive reversal of the yield curve are a reliable indicator for one looming recession, usually in about a year.
In recent days, the three-month yield on government bonds has topped the 1
A "painful" path to interest rate cuts
Regardless of which factor is more dominant, markets now feel the Fed has no choice but to relax, according to Evercore the central bank in 1995-1996 and 1998 as a template, as it cut interest rates by 75 basis points to boost a cumbersome economy.
"Without improving trade, non-validation of market prices would lead to further tightening of financial conditions," the Evercore team wrote.
Should the Fed delay hiking, they said, "the path to cuts could be painful to stock investors."
In fact, markets have increased with the intensification of the trade war – and now appear to be spreading to Mexico – and the Inaction by the Fed could continue to affect sentiment. The FOMC will meet from June 18 to 19, and the market price calculation assumes a 29% probability that 25 basis points will drop from the current target range of 2.25% to 2.5%.
St. Louis Fed President James Bullard said on Monday that a reduction "could soon be justified". However, Bullard was one of the most trusted members, so his views may not reflect those of the entire committee.
The case against a cut
Fed chairman Jerome Powell will face a difficult balancing act at the meeting, but not mind-boggling. Powell and most of the other FOMC members have agreed that they are satisfied with the current guidelines and are not planning any changes this year.
"The labor market is strong enough to think about interest rate hikes, but inflationary pressures are not enough to do that," said Scott Clemons, chief investment strategist at Brown Brothers Harriman. "In my opinion, economic conditions are not grounds for a rate cut, and the current economic stress is largely human-induced."
Clemons acknowledges that he is in the minority of interest rates, but also notes that trading in the futures market for Fed funds may be volatile and reversible as conditions change.
If sound economic conditions remain stable, this would keep the Fed on the sidelines.
"Something needs to change" for a rate cut, he said. "September is still 90 days away, there's not much time to head south in a hurry, it's a big exogenous event, that's 50% tariff, which means China is closing down Apple, it's not unthinkable. but hard to imagine for me. " , "