The Federal Reserve is set to make a very important rate decision today. The recent moves in gold, the dollar and equities reflect the markets anticipation that the Fed will indicate rate cuts in the meetings following this one. The market has mostly priced in the FOMC removing patience from its forward guidance and now awaits the Fed to put that in writing.
Economists see the most likely scenario that the Fed indicates a rate cut is highly probable in the next few months. Economists still put some possibility that we could see a rate cut during the meeting today. The probability of the rate cut, measured by the Fed Funds Futures Market, is less than 20 percent for today's meeting. This Fed has typically not surprised the market so unless that number is well over 50 percent, they will most likely hold the current rate.
With that in mind I would say the chances are far less than 20 percent for the Fed to cut during today's meeting. Even though the chances are low that the Fed would put in a cut at this upcoming meeting it marks the first meeting of the year where the decision is not pretty much certain.
The United States economy is showing signs of a slowdown which is starting to concern the Fed. The first quarter GDP expansion came in at an annualized 3.1 percent. Atlanta Fed’s model, released on June 14th, estimates a GDP growth of 2.1 percent for the second quarter. GDP growth slowing is starting to give market participants more reason to expect the Fed will not be as patient with their language in the upcoming meeting.
— Atlanta Fed (@AtlantaFed) June 14, 2019
Another economic indicator influencing the Fed is the lackluster job growth we have had the last couple months. Two of the last four non-farm payroll figures were below 100k, with February coming in at 56k and May at 75k. This has dropped the 3-month moving average from 245k in January to 151k in May.
On the other hand, some labor market indicators remain quite strong. Unemployment rate remains at 3.6% and annual average hourly earnings rose 3.1% in May. Wage increases have been above 3% for the past 10 months which marks the highest period of wage growth since 2008.
Consumer Sentiment for May came in at 131.4, one of the top scores we have seen post 2008 recession. In totality the economy is doing just fine, some indicators remain strong while others show signs of a slowdown. This Fed seems to want to be ahead of the curve and give the economy a boost before a slowdown has a chance to gain steam.
Trade wars have given the Fed more reason to think about cutting rates. Trade wars have been a damper on economic growth and has caused some substantial volatility in equity, gold, and currency markets. Gold has had the best two weeks of the year mostly on the back of trade disputes with Mexico and China.
The Fed has been increasingly more likely to cuts rates as the trade war has escalated, giving more fuel to gold and currency markets. Financial markets are eagerly awaiting to see if the Fed is ready to start cutting. Economists think it is likely the Fed will address the trade war, slowing economic growth, and in turn remove their stance of patience. This language will set the Fed up to take action in subsequent meetings, but it is unlikely they will decrease rates during Wednesdays meeting.