Markets price in rate cuts in US
The Federal Reserve open market committee last week as expected left US interest rates unchanged but indicated it does not envisage hiking US interest rates this year.
The target range for the key Fed Funds rate was maintained at 2.25%-2.50%.
As recently as December, the central bank was guiding there would be two quarter-point rate hikes in 2019 but it now sees rates peaking at around 2.62% rather than 3.12% previously.
Those changes bring it more into line with market expectations — future contracts are not pricing in any further rate hikes.
The Fed is still projecting a rate hike in 2020 but the market anticipates the next move will be a cut in rates, by March 2020, with a second rate cut in 2021.
The Fed’s statement and its economic projections last week, as well as the tone of remarks by Fed chairman Jerome Powell at the press conference provided insight into the Fed’s increasingly cautious mindset.
It downgraded its description of the economy’s performance; it noted that the growth of economic activity had slowed from a solid rate; it referenced indicators pointing to slower growth of household spending and business investment, and it also changed its characterisation of job growth from strong to solid.
In line with this assessment, the Fed revised down its economic outlook, albeit marginally. It now expects GDP in the US to grow by a still solid 2.1% in 2019 and 1.9% in 2020.
And it continues to anticipate inflation remaining around the 2% level. Against a backdrop of more mixed US economic news in recent times and unresolved international issues including trade tensions, Mr Powell said it was the Fed’s view that it should be patient in assessing the need for any change to policy.
He also said that it may be some time before the outlook for jobs and inflation indicates clearly a need to change policy. In conclusion, the March meeting showed that the Fed was adopting a very cautious approach to monetary policy outlook.
It is no longer projecting any rate hikes for this year, while also saying it may be some time before it has a clearer picture to decide on any change in policy. The market, though, has obviously a far more downbeat view of the outlook for the US economy. It is looking for the Fed to start cutting rates by this time next year.
