Will the Fed cut interest rates this summer?
It looks increasingly like the US central bank will decide to move on rates in due course. The main question is, when?
Last week the US Federal Reserve (the Fed) chairman Jerome Powell went out to deliver a dovish message to markets, one to which they responded with enthusiasm. The Fed has come a long way since the fourth quarter (Q4) of last year, when regular hikes appeared to be a certainty, and investors fretted about how far the Federal Open Market Committee (FOMC) would go.
The heightened volatility of Q4 evidently spooked the Fed into responding, while trade wars are clearly beginning to worry Powell and his team. Data has also begun to weaken, and true to their pledge of being ‘data dependent’, the Fed has begun to move.
The US-Mexico standoff went away as quickly as it arrived last week, but we should probably assume that US President Donald Trump will employ these tactics again – tariffs are now a regularly-deployed weapon in his armoury, and given the US’ economic muscle, Trump will not be shy of trying to employ these tactics again, whether against China, Canada or Europe.
Jobs data shows weakened wage growth
Not only did Friday’s headline non-farm payrolls (NFP) miss forecasts, but the three-month average was dragged down to 151,000 due to downward revisions to the previous months. Wage growth has been weakening too, and this is perhaps the element that will bother the Fed the most.
Producer price index (PPI), consumer price index (CPI) and import prices this week will help provide more clues as to the outlook, as for the moment it seems most voting members are not ready to jump in the direction of more rate cuts. Retail sales and industrial production this Friday will give us further clues about the outlook too.
The jobs data outweighs the noise around the Mexico tariffs and their apparent resolution. Data is more important than the Trump’s tussles with foreign nations. At present, the weakness in some data, such as wages, is insufficient to support the view that a rate cut is necessary, since low unemployment should help to boost inflation to a degree. Despite running below their inflation target for so long, the FOMC does not deliberately look to overshoot inflation in order to balance out the picture. All they can do is wait to see if data begins to reduce upward pressure on inflation.
Upcoming FOMC meeting
We should watch for comments in the June FOMC meeting to see if Powell has managed to ‘persuade’ any others to come round to his view, in order to prepare the groundwork for a rate cut in the near future.
The best guide we have is 1995 – then the Fed reacted to weakening data by cutting rates three times in an eight-month period to stave off further deterioration. Perhaps the same approach will be employed here.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Please see important Research Disclaimer.
Federal Reserve meeting
Find out how the Fed affects the markets ahead of the FOMC meeting taking place between 18 - 19 June 2019.
- How might the next Fed meeting affect traders?
- What was decided at the last Fed meeting?
- How does the FOMC announcement usually affect the dollar?
Live prices on most popular markets
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.