Odds are increasing that the Federal Reserve will cut interest rates for the first time in almost ten years when its policymakers meet next week.
A cut “is possible next week,” says Vanguard senior economist Andrew Patterson. It would be a “bit of shock and awe” and could help ease concerns of an inverted yield curve, which is a good recession indicator 12 to 18 months in the future, explained Patterson.
If the Fed doesn’t cut next week, it’s likely to cut in July, according to Vanguard economists and a growing number of economists at other financial firms.
A July cut would follow the G-20 meeting, set for late June in Japan, when the market will be focused on signs of any progress in U.S.-China trade talks if President Donald Trump and President Xi Jinping meet on the sidelines. That hasn’t been decided yet.
As of late Thursday, June 13, market expectations for a Fed cut next week are near 30% and over 65% in July, according to the CME’s Fedwatch indicator.
Vanguard is one of several firms who have revised their outlook for Fed action this year, abandoning expectations for any rate hikes and moving toward expectations for rate cuts.
Vanguard now expects two rate cuts this year, along with Evercore ISI, while Barclays expects three rate cuts and BlackRock one or two. The consensus among market economists calls for at least one cut this year, according to a recent Wall Street Journal poll. The current federal funds rate, which has held steady since December, is between 2.25% and 2.5%,
Federal Chairman Jerome H. Powell indicated last week that the central bank was ready to take “appropriate” action to sustain the economic expansion if Trump’s trade war slowed growth, a statement that rallied stocks.
A day earlier St. Louis Fed President James Bullard, who is a voting member of the Fed’s policymaking Federal Open Market Committee, said a rate cut “may be warranted soon” due to global trade uncertainties, muted inflation and inflation expectations and a yield curve signaling that short-term rates are too high.
These are the same reasons that Vanguard’s chief economist refers to in the firm’s updated outlook released Thursday.
“The potential for recent trade tensions to hurt the U.S. economy has only strengthened the market’s conviction that rate cuts are appropriate,” wrote Davis. “Given the persistently weak inflation readings, an uncertain trade and growth environment, and an inverted yield curve that the Fed has been dealt, it is becoming increasingly difficult for it to withstand near-term pressures for a rate cut.”
Among the latest economic indicators that could support a Fed rate cut as early as next week are the May Consumer Price Index report showing core inflation falling to 2% from 2.1% in April and the May jobs report showing payroll growth of just 75,000, one of the smallest monthly job gains since 2009 during the economic expansion.
— Check out Trade Policy Is the Biggest Risk to US Growth: Surveys on ThinkAdvisor.