Fed Opts to Leave Rates Unchanged in June’s FOMC Meeting. Is the Tide Changing?
Fed Chair Jerome Powell left rates unchanged following June’s FOMC meeting. Despite equity markets reading this as a good sign, sending the S&P 500 back up to all-time highs, it may be far from business as usual. Beginning his address to the assembled press by confirming that inflation is running below the Fed’s 2% objective, Chairman Powell cited several concerning “headwinds” to the Fed’s goals of full employment and steady growth.
These included indicators of underwhelming global growth and escalating trade conflicts, which are also being felt closer to home with recent drops in surveys of business confidence. The big question remains whether these factors will continue to weigh on the Fed’s economic outlook and require a more accommodative approach moving forward.
Despite being at loggerheads with President Trump, who would like to see immediate rate cuts as well as a return to QE, it would seem that the tide is also slowly turning among the group’s participants, who, according to Powell, “now see that the case for somewhat more accommodative policy has strengthened.”
This combination of factors, as well as weak consumption, slowing business investment and declining manufacturing production, have led many FOMC members to the conclusion that “the risk of less favorable outcomes has risen”.
Inflation declined in Q1 after having run close to 2% in 2018. Powell struck a somewhat conciliatory note when stating that it is moving back up, but at a slower pace than was initially expected. He referred to the various indicators and surveys used by the group as “imperfect proxies”, but conceded that they nevertheless reveal a pessimistic outlook regarding the prospects of inflation going back up.
As far as the breakdown of participants’ views, many now believe that a rate cut will be appropriate and that “the case of additional accommodation has strengthened” since the FOMC’s May meeting. Eight FOMC members favored a rate cut this year, eight voted to keep rates unchanged and one member voted for a rate hike. The door now appears to be wide open for a rate cut by the end of the year.
Market reaction has been mixed. Many of the main media outlets have been focusing on the positive reaction from the equity market. The S&P 500 was up 0.4% on the day and has since edged up towards the all-time highs it set in May of this year. Meanwhile, the US dollar has fallen by more the 1% against a basket of its main trading partners and gold surged to highs last seen in September of 2013. This is particularly concerning as capital seems to be flowing into what are regarded as safer assets, possibly pricing-in a more pronounced downturn that the Fed seems to be gesturing towards.
This is the second time that the Fed has performed a u-turn in policy this year. Between 2015 and 2018, it raised rates a total of nine times. Earlier this year Chair Powell indicated a move away from steady increases in favor of a wait-and-see attitude. But now with the dovish tone he struck on Wednesday, it would seem that wait-and-see may be making way for an inevitable cut.
We will keep you informed as the story unfolds and as markets continue to price-in the likelihood of a coming rate cut.
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