Will the Fed reverse course on rates?

by Ryan Smith11 Jun 2019

The Federal Reserve could be about to reverse course on rate hikes, some industry watchers predict.

The Fed raised rates four times last year, with the last hike in December putting the federal funds rate in the 2 ¼ to 2 ½% range. However, sluggish inflation and other economic indicators have led the central bank to keep the rate unchanged at its last three meetings.

While the Fed was widely expected to continue holding rates steady this year, markets are increasingly betting on a rate cut. Last month, Fed Chairman Jerome Powell downplayed speculation that the central bank would cut rates – but heightened trade tensions and a darkening economic outlook are making a cut more likely, according to a Wall Street Journal report.

Traders in futures markets are giving odds of about 20% that the Fed will cut rates at its meeting next week – and a 70% chance of at least one cut by the central bank’s July 30-31 meeting, WSJ reported. And unlike last month, Fed officials haven’t explicitly pushed back against the market pricing in expected cuts. Instead, they have said in interviews and speeches that they’re considering the risk of an economic slowdown – a sign that a rate cut may at least be considered at upcoming meetings.

Fed officials “need to be prepared to adjust our views of what’s happening in the economy,” New York Fed President John Williams said at a forum in New York last week. “There is heightened uncertainty about how this economy exactly is going to evolve over the next year or so, and I think that’s what the markets are seeing and telling us as well.”

While the economy hasn’t taken a dramatic tumble, escalated trade tensions with both China and Mexico are worrying investors, WSJ reported. If those tensions begin to affect business investment, it could slow hiring and consumer spending.

The next meeting of the Federal Open Market Committee, the Fed’s governing board, will be held June 18-19.