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5 Things To Watch Out For From The Fed This June

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Investors turn their attention to the FOMC meeting this Wednesday. At the conclusion of the two-day event, the Federal Reserve will be releasing its monetary policy statement.

It will also include the updated economic forecasts and the policy makers projections on interest rates, known as the dot plot.

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A rate cut looks very likely but not at this week’s meeting. This begs the question of when and how much.

fed funds rate
Fed funds rate, May 2019

The dovish outlook comes as President Trump maintains his anti-tightening rhetoric. In his recent interview to CNBC, Trump called the rate hikes last year “very very destructive.”

With some of the various indicators turning soft, the prospects of a rate cut have increased over time.

Here are five things to watch out for in the run-up to this week’s FOMC meeting.

Tame Inflation

While the Fed generally targets a 2.0% inflation rate, there has been a consensus shift in the past few meetings. The Fed is now willing to let inflation shoot past the 2% inflation target rate. This is in order to justify the prolonged low inflation regime previously.

However, inflation itself has been trending weaker.

Headline inflation or CPI slipped to 1.8% on the year in May, from 2.0% previously. The US core CPI rate also cooled to 2.0% on the year in May. This was slightly down from 2.1% in April.

The slower pace of inflation comes amid lower energy prices as well as automobiles.

Weakening Trends in Hiring

The US labor market has been one of the strong points underpinning growth over the past few quarters. However, the data from BLS for April and May saw the US economy adding the lowest pace of jobs in years.

While the unemployment rate is firmly anchored to multi-decade lows, the recent trend in the jobs report is something that the Fed will take notice of.

Wage growth, amid benign inflation, has failed to make any major strides. On a year over year basis, annual wages in the US remain steady at 3.1%.

Trade Tensions to Cause Uncertainty

Trade tensions are another aspect that has raised concerns from central banks across the world. With the US and China trade talks falling apart, the US raised tariffs on a number of goods imported from China. Meanwhile, the threat of further tariff hikes remain.

The uncertainty on trade is not just limited to China, but also to Mexico. And President Trump’s new strategy of using trade as a means to negotiate on various issues has raised concerns across all circles. The trade tensions have the potential to very quickly escalate and that could threaten growth.

Growth Set to Slow in H2, 2019

Economic growth is no doubt set to slow in the second half of the year. This comes as various composite indicators suggest a slowdown. Markit’s composite PMI has been edging closer to the 50-level on the index.

A drop below the 50-level could potentially signal a slowdown in the economy. Growth was already seen easing off the gains from the final quarter of 2018. And it is unlikely that the US economy would be able to maintain a 3% quarterly average growth rate.

Fed Forecasts and Dot Plot

The Fed’s economic projections and the dot-plot will be closely watched amid shifting policy. At the March meeting, the Fed signaled that there would be no more rate hikes this year. However, it maintained that rates would approach 2.6% by 2020 and remain at this level through 2021.

The Fed also lowered its growth forecasts from 2.3% to 2.1% for 2019. Growth is expected to slow even further by 2020 to 1.9%.

The meeting this week will, therefore, set the expectations for the Fed’s policy looking ahead. The matter of timing is also likely to crop up during the press conference.

Currently, the markets are pricing in a rate cut at least once this year. The Fed funds probability rate shows a 68% probability for a 25bps rate cut in July. This would put the Fed funds rate to 2.20% – 2.25%. The odds for a rate cut in September assigns a 57% probability for another rate cut by 25 bps.

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