FOMC June 2019 Meeting Preview

Fed will likely leave its current policy rate unchanged tonight. The Fed may downgrade its assessment of business investment but not of the jobs market, even as it notes the decline in inflation expectations since early May. We also anticipate that the FOMC will switch in its policy statement from referring to a "patient" approach when setting policy to favoring being "flexible" and with dot-plot graph now revealing that few FOMC members are now expecting rate cuts, although the median projection will be unchanged.

Earlier this month, Powell said the economy is growing but given trade developments, they are unlikely to sustain expansion. While he never used the words rate cut, investors rushed to price in easing. In addition, we are expecting that the Fed will give clear signals of rate cuts ahead thereby showing its readiness to ease policy, while the median 2019 dot is expected to still show no change in policy so far.

The US-China trade tariffs are showing impact to the economy. However, there are good reasons for the Fed to hold off this time around, with the G20 meeting widely seen as a potential breakthrough moment in US-China relations. With President Donald Trump and Chinese President Xi Jinping expected to meet at the summit, the Fed will understand that a deal between the two sides would lessen the need for action from it.

Market participants clearly believe there is a need for the FOMC to respond to global uncertainty, and to do so quickly. Between now and Nov 2020, four cuts are priced in, with the first to come on the market's expectation in Jul. This is what the Fed did in 1995 to keep the expansion going. But back then the easing cycle started from a mildly restrictive monetary policy stance. As of now, benchmark rates are still hovering in neutral territory, which suggests a much more bearish assessment of the balance of risk from the central bank would be required to satisfy market expectations.


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