What did we learn from the June FOMC?
Well, we learned that Jim Bullard is Donald Trump’s new favorite Fed official, that’s for sure. One imagines Trump took note of the first dissent of Jerome Powell’s tenure, assuming the president wasn’t too busy counting the $25 million he raked in following Tuesday night’s raucous stadium rally in Orlando.
Half-jokes aside, we learned that the Fed is in no mood to challenge the president or market pricing (and there’s a connection there, given that tariff escalations beget rate cut bets).
“The Fed delivered everything but a rate cut”, Barclays wrote in their postmortem. “The outcome of the June FOMC meeting was more dovish than we anticipated”, the bank said, a notable assessment considering Barclays pulled forward their call for cuts to July just a week after initially adopting easing as their baseline in the wake of the Mexico tariff threat. Barclays is surprised that eight officials see cuts in 2019. “We had anticipated that no more than three participants would project a rate cut”, the bank says, calling the outcome of the June meeting “a strong signal” that the Fed will cut next month.
Credit Suisse, which called for a July cut earlier this month, reiterated that prediction on Wednesday afternoon. “The Fed declined to be preemptive by cutting rates today, but they are prepared to ease policy at an upcoming meeting”, the bank’s James Sweeney said.
“The growth outlook is not collapsing, but there are signs of momentum weakness in the most-cyclical parts of the economy [while] the rising likelihood of a prolonged trade dispute raises near-term risks for business sentiment and financial markets”, he continued, before again characterizing the current setup as being “consistent with past ‘insurance cut’ cycles”.
Goldman has variously suggested that the purported historical analogs around “insurance cuts” aren’t actually analogous, but at this point, it’s pretty clear that cuts are coming regardless.
Speaking of Goldman, they’ll undoubtedly have a longer assessment out later, but in their initial summary, the bank conceded that “taken together, the Committee appears to view rate cuts as more likely than not.”
And it’s not just about “insurance” anymore. As noted, the Fed’s new assessment of the inflation outlook tips a decidedly less sanguine view. Indeed, you might say that the “transitory” narrative is basically dead and buried at this point. “We read the Fed’s message today as suggesting that more than just a precautionary motive is leading the Fed to adjust its policy stance”, Barclays said, before recapping all of the cautious language and projections deployed around inflation on Wednesday.
BofA’s take was straightforward. “The Fed left rates on hold but sent a clear message – the next move is a cut. The only question now is the timing”, the bank wrote, adding that against all odds, Powell cleared a high hurdle for a dovish surprise without pulling the trigger. “The Fed managed to deliver a dovish message – exceeding market expectations – without actually cutting or committing to a rate reduction in July”, BofA remarked. For now, the bank is sticking with their call for cuts to start in September, but they certainly acknowledge that July is as “live” as “live” gets. To wit:
Our baseline is for the Fed to begin cutting in September, delivering 25bp of easing but see risks as skewed toward an earlier and larger cut. It will be a function of the data and financial conditions – if we get another weak payroll report, disappointing ISM surveys and a bad outcome from the G20, the Fed will likely be inclined to cut in July. If the data are mixed and markets are content, the Fed will likely continue to “monitor” and wait until September. The next two weeks will be absolutely critical to determining the timing of the move and we expect “Fedspeak” to guide markets during the week of July 8th.
Markets aren’t waiting around. A July cut is fully priced.
So, while the only question for analysts may be “When?”, the only question for markets is “By how much?”