Traders in futures markets have signaled a 22.5% probability of a rate cut at the FOMC's June 18-19 meeting and an 86% chance of a cut at or before its July 30-31 meeting, according to CME Group.
Economists polled by The Wall Street Journal gave a different picture: About 0.5% said they expect the Fed will make a move at next week’s meeting and about 40% pegged it to the July gathering. About 30% said they expect the next move would be in September.
That makes July the safe bet, with perhaps language in next week’s statement aimed at reassuring investors that the central bank stands ready to act. That’s what the FOMC has done in past cycles when they wanted to keep their powder dry while steadying financial markets.
That assumes, of course, that we don’t suddenly find ourselves on the brink of another trade war with Mexico. Or, perhaps it will be a widening of trade conflicts with Canada. Or, there could be an escalation of conflict in Strait of Hormuz, the passage used by almost a quarter of the world’s oil supply on its way to markets.
And, don’t forget China. President Donald Trump has said he’ll hold off on plans to tariff remaining Chinese goods until after meeting with Chinese President Xi Jinping at the G-20 in Japan on June 28-29, the week after the Fed meets. But, you never know. The world’s two largest economies were on the brink of signing a trade pact in early May when a tariff truce blew up into a full-blown tariff war.
“We do not know how or when these trade issues will be resolved,” Fed Chairman Jerome Powell said in a speech last week. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.”
Federal Reserve Bank of St. Louis President James Bullard said in a speech last week that a lowering of the central bank’s short-term target rate “may be warranted soon” because of trade tensions. It was the first time a Fed official publicly suggested the need for a rate cut since the central bank put rates on hold in January. Bullard is currently a voting member of the rate-setting Federal Open Market Committee.
The Fed “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty,” Bullard said. “Global trade disputes may be more protracted and more difficult to resolve than previously envisioned.”
Don’t expect to hear additional comments from Fed officials. The Fed imposes a quiet period starting the second Saturday before an FOMC meeting during which officials refrain from commenting on the economy and monetary policy. The Fed refers to it as a “Blackout Period.”