With talks of a possible rate cut during tomorrow’s meeting, the Federal Open Market Committee may attempt to avert a recession in 2019. Throughout this extended bull run, the Fed has attempted to slow inflation back to natural levels of around 3%. After years of effort, the economy has begun to lag leaving the Fed in an unclear position.
One option is to cut their Federal funds rate likely lowering inflation for the coming quarters and signaling a riskier environment for the stock market. Historically, the Fed has been cautious to avoid preemptive action due to market pressures or a desire to prevent a recession. They are traditionally a reactionary organization relying predominantly on economic data rather than “noise” coming from Wall street.
With this “noise” growing louder by the day, markets now estimate a 61% chance of 3 rate cuts in 2019. The CME Fed Watch tool is signaling a 29.2% chance of a rate cut in tomorrow’s meeting, but the number jumps above 60% for the following three meetings. Essentially, the market is looking for multiple rate cuts in the coming months but expects the Fed to postpone their actions as long as possible.
This outlook can completely change in a month’s time however and the Fed has good reason to hold off before taking action. The upcoming G-20 Summit later this month will present an opportunity for the US and China to reach a trade deal. Additional political implications could also be in play including dispelling any rumors that they are caving under critiques. Finally, seeing as rates were just raised in December, a rate cut now could give the impression of backtracking.
If the FOMC report tomorrow passes with no action, the press conference from Jerome Powell could provide enough fuel to move markets. There is also a reasonable chance the Fed lowers rates to provide a more accommodating investing environment. Should that happen, expect markets to become volatile while they price in the new investing landscape.
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