Fed Kicks Down Door for Future Rate Cuts
The Fed did not change rates today, but kicked down the door for cuts this year. In fact, seven members see two cuts by year end. St Louis Fed President James Bullard dissented, calling for a 0.25% rate cut today.
The Fed lowered its own projections on Core PCE (inflation) this year to 1.8% versus March’s forecasted 2.0%. GDP was held unchanged at 2.1%. Lack of inflation is going to be a key driver of low rates for the foreseeable future.
Futures markets have a 100% probability of a cut at the July 31st meeting. Remember that the Fed has never not cut when market odds > 50%. While 100% might be overdone, the Fed would need to send all sorts of signals over the next month to drive those odds below 50%.
Current odds of three cuts are below.
Odds of Fed Funds Below 1.75%
Dec 2019 44%
June 2020 71%
In the actual statement, the FOMC committed to acting “as appropriate to sustain the expansion” and removed the word “patient” to describe its current stance. The FOMC also indicated that “uncertainties…have increased.” During his press conference, Powell added, “risk sentiment in financial markets has deteriorated.”
While the Fed is clearly shifting to a dovish stance, here’s your Random Thought of the Day – the Fed may be cutting rates before it has officially ceased balance sheet normalization.
Powell likely wanted to leave himself a little bit of wiggle room in the unlikely event Trump announces a sudden resolution to the trade spat with China, particularly given the upcoming G20 meeting on June 28th and 29th. Otherwise, the Fed appears poised for two cuts this year. I think there is a small but non-0% chance that the Fed cuts 0.50% in July instead of cutting in a nice methodical manner.
While rates are still very choppy, the front end is experiencing the most downward pressure. The 2yr Treasury is down 0.10% to 1.76%, its lowest level in 18 months.
The 10yr Treasury is down to 2.02%, its lowest level since the election. Gut feeling – the 2.00% threshold on the 10yr Treasury will hold for today. Nothing in this statement was strong enough to cause a breach of that level. Inject some depressing news, however, and a 1-handle 10T is on the table.