Economy

FOMC's Forecast for Rate Cuts in 2019 Is Slower Than Market Expectations

Jon C. Ogg

Published: June 19, 2019 2:39 pm

Last Updated: March 13, 2020 5:03 pm

We now know what the Federal Reserve’s decision on interest rates is for the June 19, 2019 FOMC meeting. Fed Chairman Jerome Powell and fellow voting members decided to leave interest rates unchanged in the current 2.25% to 2.50% range. The vote count was 9-1, with St. Louis’ Bullard being the dissenting vote.

How the markets are going to interpret Wednesday’s FOMC meeting will be something akin to a “Disappointing Rate-Cut Lite” based on the forward guidance and the forecasts by Fed officials. The Fed’s media fed funds rate projections were kept at 2.4% for 2019, but 2020 was geared down to 2.1% from 2.6% in 2020 and 2.4% from 2.6% for 2021. This is one of those instances where the market expectations were more aggressive than Jerome Powell is signaling he wants to be.

While many investors may have thought the most important issue was the Fed Funds rate, the CME FedWatch Tool showed only a 24.2% chance of a cut right before the announcement. The more important issue is how Powell and the FOMC see the economy shaping up on a live basis for future interest rate cuts, and the CME FedWatch Tool showed better than a 50-50 chance (63.7%) for a July 31 cut to 2.00% to 2.25% and almost 50-50 (47.7%) for the September 18 announcement.

The FOMC already knew that the economy had started to slow, particularly outside of the United States, even before China backed out of its negotiated trade points in May. Then new tariffs against Mexico, which are currently said to have been avoided, added on more uncertainty. The June 19, 2019 FOMC meeting had some pundits and investors prematurely calling for a June rate cut. A total of two rate cuts are what the CME FedWatch Tool has been predicting for 2019.

Interest rates cuts now appear to be more likely for 2019, but the “when” is still up for debate. There were 8 of 17 Fed officials who now project that that the benchmark fed funds rate will need to be lowered in 2019. There are also 7 of those 8 who see the need to lower interest rates twice. Only 1 Fed official has projected that the FOMC will need to raise interest rates this year.

This may seem somewhat disappointing that not more Fed heads are calling for rate cuts in 2019. The economic growth terms have been made less strong to a tad weaker, and inflation expectations are lower as well.

As far as how much and when, the majority of FOMC officials are now projecting that Fed Funds will be under the current level by the end of 2020.

Two outlooks seem to have emerged in the Fed’s models. One is that trade negotiations will avoid additional disruption to the global supply chain while dragging on business investment, which would be a rate-neutral outcome. The second outlook is one where trade tensions escalate and weaker growth leads to a sharper economic downturn in the U.S. economy. That second scenario would being a more aggressive Federal Reserve to lower rates.

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One key issue to consider is that the Fed’s statement is more about closely monitoring developments rather than about being patient. Another issue is that there continues to be a third (even if unofficial, and even if you we have always known it) mandate of monitoring readings on financial and international developments.

The formal FOMC statement said:

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

… The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

The Fed’s projections are not much changed since March on GDP. Those are now 2.1% for 2019, 2.0% for 2020 and 1.8% for 2021 with a longer-run forecast of 1.9% in real GDP growth. Unemployment forecasts have been moved down to 3.6% for 2019, 3.7% for 2020 and 3.8% for 2021. The PCE inflation expectations moved lower to 1.5% for 2019 and 1.9% for 2020; and core-PCE inflation expectations moved down to 1.8% in 2019 and 1.9% in 2020.

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The Dow has risen by about 55 points to 26,522 after the news, and the S&P 500 was up about 6.50 points to 2,924.20. Gold was higher by $8.00 per ounce to $1,358.80 and crude oil was last seen down 35-cents at $53.55 per barrel.

Where the big move was seen was in the 10-year Treasury note and 30-year Treasury bond. The 10-year yield fell from about 2.085% down to 2.049% and the 30-year fell from just over 2.57% down to 2.56% since the FOMC’s formal announcement and forecasts.

Now the markets just have to interpret what Fed Chairman Jerome Powell means when he gives his post-meeting press conference.