FOMC Decision: What It Means for Investors
The Federal Reserve left interest rate unchanged in June 2019.
However, they did signal that another could be on its way if the U.S. economy broke down.
After last raising rates in December 2018 to a range of 2.25% and 2.5%, officials now have a dimmer view of the economy, and signaled they’re ready to act. “Uncertainties about this outlook have increased,” according to the Fed. “In light of these uncertainties and muted inflation pressures, the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
In short, it means the Federal Reserve is standing by, ready to cut if the economy shows signs of falling apart. Expectations for lower rates increased dramatically after trade negotiations between the U.S. and China stalled, mid-June 2019
60% Probability of a July 2019 Cut
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“The bottom line is that the Fed appears to be focused on walking a fine line, attempting to provide reassurance that the economy remains on track, while still opening the door even further to the potential for rate cuts in the coming months with the goal of extending the current expansion,” said Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors, as quoted by Barron’s.
While the Fed expects to cut once or twice, it doesn’t expect to do so until 2020.
However, according to the CME Fed Watch, there’s 60% probability of a cut of 200-225 basis points. Then again, it’s all up in the air at the moment especially once you consider that policymakers have seen mixed economic signals, mid-year 2019. Following a weak jobs report showing just 75,000 jobs added in May, retail sales were better than expected, for example.
In short, the Federal Reserve is in a very tight spot.
Growth remains above its longer-term trend with a strong jobs market, which would be an argument against cutting interest rates. That, and trade disputes could always be resolved quickly, removing a major obstacle for economic expansion. However, if a global slowdown becomes a drag on the U.S. economy, it would be an argument for a cut.
In the end, the Federal Reserve really has to walk a very fine line.
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