As expected, the Fed left the policy rate unchanged at 2.25%–2.50%. The decision came amid divisions over what is ahead and still leaves open the possibility that policy loosening could happen before the end of the year depending on how conditions unfold.

Despite cautious wording, we are betting the Fed rate cut could happen as soon as July, raising our probability to 90% from 60% previously for a July rate cut supported by three key factors. First, the Fed cited “many participants now see the case for somewhat more accommodative policy has strengthened”. Second, it dropped the word “patient” and also changed the tone on the economic activity to “rising at a moderate rate”, a downgrade from “solid”. Finally, the Fed conceded that inflation is “running below” its 2% target i.e. it now projects 2019 headline at 1.5% from March’s 1.8% with core inflation (which excludes volatile food and energy prices) at 1.8% from March’s 2%.

• As expected, the Fed left the policy rate unchanged at 2.25%–2.50% and indicated formally that no cuts are coming in 2019. The decision came amid divisions over what is ahead and still leaves open the possibility that policy loosening could happen before the end of the year depending on how conditions unfold. The Fed predicts 1–2 rate cuts in its set of economic predictions, but not until 2020.

• Despite cautious wording, we are betting the Fed rate cut could happen as soon as July. In fact, we have raised our probability to 90% from 60% previously for a July rate cut. Three key factors allowed us to raise our rate cut probability for July. First, the Fed Chair has opened the door to the possibility of a more accommodative monetary policy, citing “many participants now see the case for somewhat more accommodative policy has strengthened”.

• Second, the Fed provided an important nod to those worried about slower growth. It dropped the word “patient” in describing its approach to policy. The characterization was a key part of the Fed’s “pivot” earlier this year that signalled to the market a more dovish approach to rates. Also, it changed the language from its May statement to indicate that economic activity is “rising at a moderate rate”, a downgrade from “solid”.

• Finally, the Fed did not surprise us with the decision to maintain rates. But the split vote tells us that a cut is on the way and it is increasingly likely that will be in July. It could be a compromised decision. Furthermore, the Fed statement changed the wording to concede that inflation is “running below” the Fed’s 2% objective, projecting 2019 headline to 1.5% from March’s 1.8% with core inflation (which excludes volatile food and energy prices) at 1.8% from March’s 2%.

Source: AmInvest Research - 20 Jun 2019