FOMC Preview: Powell Likely To Stay On Hold, Open The Door To A July Cut

Oh, what a difference six months makes!

Back in mid-December, the Federal Reserve raised interest rates for the ninth time this cycle and hinted that policymakers were looking to at a couple more hikes over the course of 2019. Now, after a major escalation in the trade war between the planet’s two largest economies and a sustained drop in inflationary measures, the Fed is considering multiple interest rate cuts by the end of the year:

(Click on image to enlarge)

Source: Forex.com

As the above graphic shows, growth is not a particularly urgent concern for the central bank, but the coordinated deterioration in a variety of inflation indicators certainly is. Back in March, zero members were expecting a rate cut at any point in the next three years, and with data generally holding steady (albeit at low levels), there’s no urgency for an immediate rate cut tomorrow in our view.  Instead, Powell and Company may use Wednesday’s release to set the stage for a potential rate cut next month.

What to Expect

  • The central bank may replace the wording in its statement to say that the committee “will act as appropriate” to sustain the economic expansion (instead of “be patient” when setting policy).
  • “Housekeeping” updates to the statement (e.g. labor market gains “have moderated,” increased downside risks from trade, etc)
  • Policymakers may also revise down their Core PCE inflation forecasts for the rest of this year (1.8%) and 2020 (2.0%).
  • Most “dots” to shift to expecting one rate cut by the end of the year.

Such a shift would still leave a dramatic difference between what traders are expecting and the Fed’s forecast; regardless of what happens this week, the gap between Fed forecasts and market pricing for interest rates will be a major dynamic to watch for the rest of the year.

Possible Market Reaction

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