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Three reasons why the Fed will not lower interest rates at its June meeting



Federal Reserve Chairman Jerome Powell holds a press conference in Washington on January 30, 2019 following a two-day meeting of the Federal Open Market Committee.

Leah Millis | Reuters

Almost everyone is convinced that the Fed will lower interest rates this year, so the central bank faces an urgent question: why wait?

After all, the market already priced at a slight discount this year and probably three. Although the Federal Open Market Committee will convene next week, hardly a step is expected.

Federal Reserve observers say the stalemate next week has essentially three reasons: the upcoming G-20 summit, in which the US and China could participate, could at least theoretically reach a trade agreement; a desire not to be viewed as overly influenced by the financial markets and President Donald Trump's Hectoring; and the desire to avoid a rate hike in December seems to be a political mistake.

"They do not want to be viewed as a lever, be it politically from the White House or the market," said Lindsey Piegza, chief economist at Stifel. "The Fed will look at the data, they'll look at what their models say, they do not care what the markets say."

"No cuts this year are hard to believe & # 39;

Wall Street, however, pleads for a cut.

The futures pricing on the Fed Funds market on Friday afternoon showed a 21

% chance of a move at the June 18-19 meeting, after 30% earlier in the day on some stronger than expected economic data. The opportunity for a cut in July remained at 85%, while the market predicted a 61% chance of a total of three moves by the end of the year.

According to the current status of Chairman Jerome Powell and his colleagues from the Fed, no trains are indicated. This is likely to change when FOMC members attend the meeting on 18/19. June to present their economic forecasts, which show individual members' expectations of where interest rates will go in the next few years as a "dot chart".

"I can not imagine what they will do with the dots," said Jeffrey Gundlach, founder of DoubleLine Capital, in a webcast on Thursday. He noted the "big divergence" between the market and Fed forecasts and said, "No cuts this year are hard to believe."

In May, Gundlach recommended a straddle option trade, which benefited from strong interest rate fluctuations. The trade had recently recorded an increase of 22%.

Fed officials were under heavy pressure from more than the markets. Trump was a constant nemesis to the central bank. Most recently, he reiterated his call for lower interest rates and said he was "not happy with what [Powell has] did as Fed Chairman."

Accordingly, the Fed has to take care of its credibility.

Trump and a growing number of market participants see the rate hike in December – the fourth of the year – as a political mistake that occurred between multiple pivotal points and missteps that led Powell and other officials to change their public statements The nerves of investors.

"A Verbal Intervention"

From October to March, the Fed was no longer "far from neutrality" in terms of interest rates and balance sheet cuts on "autopilot," as Powell put it. adopt a "patient" attitude to politics and finally set a timetable to end the balance sheet program by September. Officials have also lowered the projected level of interest rate hikes from two to zero and are now able to report a likelihood of cuts if FOMC members so agree.

"It is a difficult transition for the Fed to face two hikes in interest rate hikes this year, and it is moving closer and closer to interest rate cuts," said Quincy Krosby, chief market strategist at Prudential Financial.

Krosby recently pointed to two key events This was a sign of another change in policy – statements by Powell and Deputy Chairman Richard Clarida in early June provided the basis for possible cuts. In Powell's case, it was a promise to "act appropriately to sustain expansion," while for Clarida it was a vow to adjust politics to keep the economy "in a good place."

"You can not refuse the comments from Powell and Clarida, it was orchestrated, they laid the foundation, that's what the Fed is doing," Krosby said. "It turned out to be a verbal intervention and they did not even have to do anything – the market reacted."

In fact, equities have been on a solid footing lately, with the Dow Jones Industrial Average up more than 5% in June after a brutal May. This strength in equity gives the Fed further support on which it can rest if it does not want to cut this month, although in the past this was not always enough to end the easing.

But if the market strength continues and the US and China come to a trade agreement, at least the level of expectations for cuts could be lowered.

Tom Porcelli, chief economist at RBC in the US, said a customer survey showed that 85% of customers would not do so if a trade agreement came into being, reacting negatively to a Fed rate cut in July.


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