Expectations of Near-Term Multiple Rate Cuts Are Premature, Data Suggests
Since early May, the markets have been signaling a higher chance for a rate cut at the June 19th meeting of the Federal Reserve Bank due to rising US-China trade tensions.
This article will examine if recent macroeconomic conditions have changed and warrant a change in expectations for a rate cut.
Since US-China trade tensions began re-escalating in early May, market participants’ views of likely Fed policy for the remainder of the year have shifted dramatically. As of June 12, there was a 20% market implied probability of a rate cut at the June 19 meeting and an 80% chance of a cut in late July. Contrast this with two months ago, when investors saw virtually no chance of a June cut and only a 10% possibility of one in July. Moreover, this is just the beginning, as multiple rate cuts are now priced in over the next 12 months. It may be hard to believe (but we assure you it’s true) that as recently as February, the Federal Open Market Committee (FOMC) itself was still penciling in two rate hikes for this year.
What Does the Data Say?
A natural question under these circumstances is whether changes in macroeconomic fundamentals over the last few months warrant this drastic shift in rate expectations. Given the Fed’s dual mandate, we investigate several variables relating to both employment and inflation performance. A summary table is presented below, comparing recent performance to conditions prevailing in September 2007, the last time the Fed initiated an easing cycle.