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The biggest question for the highly anticipated FOMC meeting next week is whether the Federal Reserve will be cutting interest rates.
The question seems to be one of when rather than if. Though the Fed has voted to keep rates steady so far this year, it has indicated that it could change course if warranted.
Nevertheless, the “Halftime Report” traders think the cuts won't come next week.
Cerity Partners’ Jim Lebenthal says the Fed “doesn't want to cut. They want to have dry powder – in the ability to cut rates – for when a recession hits. The market does not expect and has not priced in a rate cut, so they know that they can 'get away with’ not cutting and saving their dry powder.”
Some market watchers have pointed to trade tensions, lower-than-expected inflation, and the disappointing May jobs report as reasons to expect an economic downturn. Despite the jobs miss, markets rose last week on expectations that the Fed would have to lower rates sooner.
But Stephanie Link of Nuveen believes the new data indicates that a cut isn't necessary yet, because “we just got a set of numbers today that were solid – retail sales, IP, utilization, consumer confidence. I think [the Fed will] say they are watching the data and will decide.” Such a statement would be consistent with Fed officials’ emphasis on a “data dependent” strategy.
Another key phrase is “patience,” according to Shannon Saccocia, Boston Private's CIO, who agrees rate cuts are unlikely this month. Basing her argument on the Fed's past activity, she says, “They have stressed patience when referring to further rate hikes; we think patience will apply when assessing rate cuts as well. The nine rate hikes they have implemented since 2015 have been hard earned, and we think they will be reticent to start down a rate-cutting path unless completely necessary.”
If the Fed doesn't cut this month, what should they be doing instead?
“They need to keep walking the line of letting the market know that the Fed could intervene to support the economy, while at the same time expressing confidence in the economic outlook going forward,” Saccocia advises.
Similarly, Lebenthal sees the June meeting as a balancing act. Even if the Fed doesn’t use up its “dry powder” right now, “they need to maintain the tone of being aware that trade tensions can potentially slow the economy down. They need to repeat that they will do whatever needs to be done (i.e. cut rates) to keep the expansion going.” Lebenthal sums up this unconventional strategy as “all talk and no action.”
The market seems to agree with the “Halftime Report” traders. According to Reuters, the fed funds futures market signals that the probability of a rate cut by September 2019 is nearly 98%. But the probability for a cut following the June meeting is just 22.3%.
The FOMC meeting starts on June 18, and the decision will come down on June 19.