Fed is widely expected to keep federal funds rate unchanged at 2.25-2.50% today. After recent rhetorics from Fed officials, markets are now looking for clues on rate cuts later in the year. As of yesterday, Fed fund futures are pricing in 85.3% of an “insurance” cut in July to 2.00-2.25%. By December meeting, markets see 83.6% chance of a total of two cuts to bring interest rates to 1.75-2.00%. However, in our view, the pricings are based on assumption of further worsening of US-China trade war. Such expectations could drastically change after Trump’s “extended meeting” with Xi at G20 next week.
As for today’s announcement, a major focus is this sentence in the statement: “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”. Change in the statement to remove the element of “patience” will be a strong indication that Fed is ready to move. Otherwise, July could be a little too soon for the “insurance” cut.
Additionally, we’d emphasize that the changes in the statement have to be confirmed by new economic projections. In March, 2019 median projections forecasts GDP to grow 2.1%, unemployment rate to be at 3.7%, core PCE to be at 2.0%. There have to be material downgrades in the numbers, in particular core PCE, support Fed’s cut. And of course, Fed projected interest rates to be at 2.4%, that is no change from current 2.25-2.50%, by the end of 2019. This figure has to be revised down too. After all, we believe that the high uncertainty of trade war should be disregarded in the forecasts. So, if they’re dovish, they’re really dovish.
Fed’s March projections:
Here are some suggested readings on FOMC:
