Wall Street, taking a hint from Federal Reserve Chairman Jerome Powell to heart, is placing high odds on the central bank reducing interest rates. Just not next week.
While the 24% chance of a cut at the June 19 meeting is 10 points higher than a month earlier, trading in rate futures still shows a 76% chance that the central bank’s monetary policy committee leaves them at the current range of 2.25% to 2.5%. Economists at major investment banks back up that prediction, despite lackluster job growth in May and mounting worry that the U.S. trade war is hurting the economy.
After the meeting, the committee will likely reiterate Powell’s June 4 comment that the Fed is ready to act “as appropriate” to support the U.S. economy if it’s damaged by broadening tariffs, said Ellen Zenter of Morgan Stanley. Such a statement would support the 67% odds of a 25 basis-point reduction at the central bank’s July 31 meeting, based on trades tracked by CME Group.
Swiss lender UBS doesn’t expect rates to fall even then, particularly if U.S. trade talks with China manage to stave off any further increase in tariffs. So far, the White House has imposed 25% duties on $250 billion of Chinese imports and threatened to tack them onto another $325 billion of goods if the two countries can’t reach a deal to give American companies more access to China’s markets and halt Beijing’s appropriation of U.S. technology.
The tariffs, which drive up prices of goods sold in the U.S., come on top of levies on steel and aluminum. President Trump has also threatened duties on auto imports as well as goods from Mexico if that country doesn’t live up to his expectations on curbing illegal immigrant traffic across the southern U.S. border.
While the moves have rattled financial markets and prompted warnings from corporate America that the trade dispute is undermining the benefits of GOP-led tax cuts in 2017, UBS believes economic growth will be sufficient for the Fed to maintain current rates.
“If we are wrong, and the economy is weaker, or escalation of the trade war causes a faster slowing in the economy, the Fed will still take a few months of data before they conclude the economy has slowed more than they desire,” said UBS economist Seth Martin. “Either way, we see a cut by September as plausible but unlikely and a cut in December as possible,” but only with consistent deterioration in economic data.
Bank of America and British lender Barclays both predict the Fed will be forced to act sooner. Barclays economist Michael Gapen expects rates to drop by 75 basis points — the equivalent of three 25 basis-point cuts — before the end of December, which might soothe some of the tension in Trump’s relationship with the Fed chairman he hand-picked to succeed Janet Yellen.
Powell fell from favor less than a year after his 2018 appointment when the president blamed December stock-market volatility on the central bank’s four rate hikes within a 12-month period.
Trump, who was told that he lacked the power to fire Powell without cause, has alternately berated and pushed the Fed since, arguing that U.S. economic growth buoying his reelection bid would be stronger if the central bank would only lower rates.
Bank of America predicts it will begin doing so in September, following up with a second cut in December and a third next year as the economy weakens. Payroll growth of just 75,000 in May, sharply lower than expected, shows a 10-year-old expansion slowing even before additional tariffs take effect, said economist Joseph Song.
“This is a game changer for the Fed going forward,” he told the Washington Examiner. “This clearly confirms our view that the Fed is going to start considering cuts in coming meetings.”
