Pressure builds up on the Fed

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06/20/2019 | 05:17 pm
The Federal Open Market Committee (FOMC) has decided on Wednesday to keep its rates unchanged. However, it suggested that it may make some cuts during the year. Markets reacted positively, but the pressure is higher than ever on the central bank.

“The case for somewhat more accommodative policy has strengthened,” said Fed Chairman Jerome Powell. While the Federal Reserve kept its rates unchanged, its language suggests that a drop is due later this year.

In response to Powell’s speech, stocks rose sharply, with the S&P 500 gaining 0.3% to 2926.46. Analysts reacted positively. Ellen Hazen, senior vice president and portfolio manager for F.L. Putnam, said, quoted by Bloomberg: “Reading the tea leaves, both they and the market are setting up for cuts to happen within the next few meetings. I wouldn’t be surprised if we saw it next meeting and they’re laying the groundwork in both the speeches and the language of the statement today.”

Meanwhile, Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, noted: “It looks like the Fed gave the market what it wanted by removing the word patient from the statement. It also showed with the dots that they are leaning very dovishly and July is absolutely on the table as the market was predicting.”

No more patience

It seems that Jerome Powell passed the test and refused to bow under pressure from Donald Trump. However, the "patience" advocated so far is now replaced by "increased monitoring" of economic indicators in the coming weeks.

This is a sharp contrast to just six months ago, when the Fed was still planning two rate hikes in 2019. Now a majority of analysts is anticipating a cut as early as the Fed’s next meeting on July 30 and 31. Analysts surveyed by CME Group estimate that the probability of a decline by July is 86%.

The truth is that the commercial trade war launched by POTUS doesn’t facilitate the Fed’s work. While Xi Jinping and Trump have agreed to meet on the sidelines of the G20, American and Chinese interests remain more distant than ever. “It’s really trade developments and concerns about global growth that are on our minds,” Mr. Powell said. And many Fed officials want to wait a little longer to see how trade issues develop before cutting rates.

Pressure from other central banks

For the time being, the Fed has left its macroeconomic forecasts unchanged. It still expects growth of 1.9%, an unemployment rate of 4.2% and inflation of around 2% in the long term.
Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities

However, it downgraded its assessment of the economy. At the last FOMC meeting in early May, the committee stated that “economic activity rose at a solid rate.” Now it says that “economic activity is rising at a moderate rate.”

Jerome Powell also pointed out that at 3.6%, business investment is rather weak. And inflation remains below the 2% target.

But there’s more. On top of the pressure from Donald Trump and financial markets, the Fed is also pressured by other central banks. While ECB head Mario Draghi just gave a very accommodating speech earlier this week, Australia’s central bank cut its rates to 1.25% in early June…
Romain Fournier
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