• As expected, the target range for the fed funds rate was held steady at 2.25-2.50% today
  • The Fed’s median interest rate projections are now showing a rate cut by the end of this year – with 7 participants thinking two 25 basis point cuts will be appropriate
  • The policy statement removed the reference to a “patient” approach to future rate adjustments, reinforcing expectations that a rate cut could be coming as soon as the next meeting in July

A policy statement that was slightly more dovish than already dovish expectations will only reinforce market expectations that a 25 basis point cut to the fed funds target range could be on its way – and as soon as the next policy decision in July. A total of 8 out of 17 meeting participants think it will be appropriate to cut rates by the end of this year. 7 of those think two 25 basis point cuts will be appropriate and one (James Bullard) voted for a rate cut immediately in June. That is a sharp shift from March when no members thought a rate cut would be appropriate this year – and a dramatic change from the end of last year when the median participant still saw 2 more hikes this year. The statement dropped the word “patient” in determining future adjustments to interest rates. That will only reinforce expectations that a potential cut in rates at the next meeting in July is firmly on the table.

Much of the shift in policymaker rate plans has come via an escalation in international trade concerns. The US industrial sector has already weakened following the implementation of new tariffs on imports from China late last year, and that was before a hike in the tariff rate on those imports from 10% to 25% in May. To be sure, as the Fed broadly reiterated, the other (non-industrial sector) 85% of the US economy has still looked relatively solid. The unemployment rate is at multi-decade lows and wage growth has been tracking 3% or higher. That admittedly is an odd backdrop to be talking about rate cuts from levels that are still historically quite low. But muted inflation trends are also leaving the Fed with plenty of flexibility to get ahead of any potential future economic shock, and escalating trade tensions certainly count as a legitimate risk at this point. We still think tensions could ease around next week’s G-20 meetings in Japan, but the Fed is also clearly aware of the damage that further escalation could have on the US economy and is ready, willing, and able to step in with rate cuts if needed.

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