FOMC June 2019 Meeting review - Rate cuts coming

US Federal Reserve left its lending rates unchanged at 2.25%-2.5%, in line with street expectation. Fed statement was dovish primarily on inflation, neutral on growth; however, in the press conference, Fed Chairman Powell was dovish on growth as well primarily due to weak fixed business investment. 

Key highlights from the FOMC statement:

  1. Bullard dissents for cut
  2. Median dot is for no change in 2019, but nearly half see lower rates
  3. Median at end of 2020 is 2.1% vs 2.6% prior
  4. Drops language saying it would be 'patient' on rates
  5. Household spending appears to have picked up but business fixed investment has been soft
  6. Activity has been rising at a moderate pace
  7. Fed will act as appropriate to sustain economic expansion with a strong labor market and inflation near target
  8. Uncertainties have increased regarding outlook for sustained economic expansion
  9. Household spending appears to have picked up from earlier in the year
  10. Indicators of business fixed investment have been soft
  11. Survey-based measures of longer-term inflation expectations are little changed

Powell Q&A Press conference highlights:

  1. In light of increased uncertainties and muted inflation pressures, we will now closely monitor incoming information
  2. Economy has been performing reasonably well this year
  3. We've been mindful of crosscurrents including trade developments and slower global growth
  4. After prior meeting, there were signs of progress on trade and global growth. In the weeks since, cross currents have re-emerged
  5. Apparent progress on trade turned to greater uncertainty
  6. Risk sentiment in financial markets has deteriorated
  7. Many on FOMC see better case for more accommodation
  8. Many labor market indications remain strong
  9. Many FOMC participants cited investment picture and crosscurrents as reasons to lower rates
  10. Participants broadly see inflation rising back to target, but at a slower pace
  11. Risks to growth and lower inflation expectations created concerns about sustained inflation shortfall
  12. Overreacting to any short-term situation would be inappropriate

Powell comments on cutting rates further:

  1. We want to react to genuine trends, not one or two data points or swings in sentiment
  2. News about trade has been an important sentiment driver
  3. Incoming data in US has been good, especially on consumer
  4. Trade risks 'seem to have grown'
  5. Law is clear that I have a four-year term and I intend to serve it
  6. The support for the path we took was quite broad
  7. I don't think waiting too long (to cut) is prominent right now
  8. Inflation and inflation expectations 'dropped', we find that notable
  9. We need to be really strong on 2% inflation
  10. There was not much support for cutting rates now
  11. All but 1 thought it would be better to see more before cutting
  12. We expect to learn if these risks will weigh upon the outlook
  13. We don't know how credible a 4% inflation target would be

In conclusion, The statement and commentary does not indicate that Federal Reserve is overtly worried about growth and therefore is in no hurry to lower rates unless economic health worsens faster than expectations (widely divided fed members expectations). We expect status quo in July meeting as Quantitative tightening will continue till then but Sept 2019 looks likely for rate cuts.

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