Jerome Powell, president of the US Federal Reserve, speaks at a press conference following a meeting of the Federal Open Market Committee in Washington, D.C., Wednesday, June 19, 2019.
Andrew Harrer | Bloomberg | Getty Images
The Fed came very close to promising a rate of reduction Wednesday, and now the markets are focused on a possible interest rate in July.
"I think they are fully planning to cut in July, absent stronger data," said Ed Keon, QMA Chief Investment Strategist. "The market liked it now, but it is important to remember that interest rate cuts are not a magic wand. There are clear signs of weakening economic conditions."
The Fed sent a wise message in its statement, but even more so in its interest rate forecast, released after its two-day meeting Wednesday afternoon. After the statement flip-flopped stocks and bonds before they embarked on a pattern where both markets were offered higher on the prospect of a rate cut. Bond yields, which move in the opposite direction, fell with the largest drop in 2-year dividends, which closely follows Fed expectations.
Fed's interest rate policy committee left the feed rate target rate unchanged at 2.25% to 2.50%, while tweaking some of the language in its statement to suggest it sees more risks to the economy. It also removed the wording that it would be "patient" language it added earlier this year to indicate that Fed officials were willing to wait and see more information before a move was made.
Analysts focused on Fed's interest rate projections showing that eight out of 1
"It was the biggest surprise with regard to dovishness. The market was already headed for quite deafness, and everyone expects them to take the word" patience ", says Leslie Falconio, senior strategist with UBS Global Wealth Management Chief Investment Office. It was really the dot plot that came out on the lazy side. "
She also noted that Fed's interest rate forecast, presented in the so-called dot plot, also showed that Fed's interest rate forecast fell from 2.6% in 2020 to 2 , 4%, pricing at least one rate cut. Fed officials' interest rate forecasts are included anonymously in the dot plot, which is literally a chart.
"They set us up for a cut but who knows when," said Peter Boockvar, investment manager at Bleakley Advisory Group. "If the data is weakened, they will cut in July. If it stays stable or gets better, they won't. People need to understand if they have to cut it because the market data gets worse. … This shows the Market Focus is on the cuts, but not the reason for the cuts. "
While the markets took the Fed as deaf and ready to move, some economists stuck with their expectations of no cuts.
" The market responded wisely to June FOMC, which partially responded to 8 dots with cuts in 2019 and 7 Of these, 50 [basis points] indicate cuts, "wrote Citigroup economists." Although the statement and the dots are lowered as early as July on the table, the result is very close to our expectations and does not change our basic cause of any cuts in 2019 – which is also the basic phase of a small majority of Fed officials. "
But John Briggs, strategy director at NatWest Markets, said the Fed should already have cut and lose control of the interest rate narrative if it waits.
" If seven of them think they should cut twice in 2019, what are they waiting for? "briggs" They will have to follow the market. … given the majority did not think they needed it, but it is a horrible fine line. "
Falconio said it seems a cut is coming but the market can expect too much." We have to wait to see what happens, but I think July may be too early. I think we have to wait to see what's going on at G-20, "she said.
Analysts said the Fed, like markets, is monitoring the upcoming G20 meeting at the end of the month, when President Donald Trump is expected meeting President Xi Jinping to see if there is a chance to resolve the trade war
Fed Chair Jerome Powell, speaking to the media after the meeting, said the Fed had to see more data to determine if the latest weakness in things like job creation were temporary or a trend. In May, only 75,000 jobs were added.
"We want to see and we will respond to developments and trends that are persistent and genuine," said Powell. The Fed is concerned about both trade conflicts and the slow-paced global economy.
"We use our tools as appropriate to sustain the expansion," Powell said.
S & P 500, completed nine of the last 10 Fed days negative , increased 8 points to close to 2,926. yearly yield fell to 1.74%, from as high as 1.91% earlier in the day. The 10-year yield was 2.02%.